equities hold the edge ridham desai - breaking news...
TRANSCRIPT
M O R G A N S T A N L E Y R E S E A R C H
August 31, 2010
India Strategy ChartbookResearchIndia
Equities Hold the Edge
Morgan Stanley India Company Private Limited+
Ridham Desai [email protected] +91 22 2209 7790
Sheela Rathi [email protected] +91 22 2209 7730
Utkarsh Khandelwal [email protected] +91 22 2209 7804
Amruta Pabalkar [email protected] +91 22 2209 7928
Morgan Stanley does and seeks to do business with companies covered in Morgan Stanley Research. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of Morgan Stanley Research. Investors should consider Morgan Stanley Research as only a single factor in making their investment decision.For analyst certification and other important disclosures, refer to the Disclosure Section, located at the end of this report.+= Analysts employed by non-U.S. affiliates are not registered with FINRA, may not be associated persons of the member and may not be subject to NASD/NYSE restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.
M O R G A N S T A N L E Y R E S E A R C H
August 2010India Strategy Chartbook
2
Contents
In this report (click on these headings):
The Key Debates
Sensex Outlook
Model Portfolio and Focus List
Summary of Sector Rotation Model
Politics & Macro
Corporate Fundamentals
Valuations
Market Dynamics
Key Concerns
Mid Caps vs. Large Caps
Equities vs. Long Bonds
Sector Charts
Long-term Equity Return Drivers
At a Glance: Morgan Stanley Stock Coverage
At a Glance: Latest Macro Indicators
At a Glance: News flow and Market Performance
M O R G A N S T A N L E Y R E S E A R C H
August 2010India Strategy Chartbook
3
The Key Debates: Equities Hold the Edge
Key Debate: Is India likely to continue its strong showing with an apparent slowdown in growth, richer valuations, and stubborn inflation? Here is our view:
India’s low-beta response puts it at risk…: India has outperformed emerging markets since February 2010, when the world started to worry about a growth slowdown and sovereign risks. This is attracting the attention of investors, making India vulnerable to a sharp correction. India’s defensive behavior is backed by a strong policy environment, resilient domestic growth, healthy corporate balance sheets, and an improving government balance sheet.
…But Indian equities still have some catching up to do: India is still underperforming EM from Jan-08 level. In other words, India has not yet fully recovered from its 2008 underperformance.
The problem is that valuations are fair at best: Investors cite India’s rich valuations as a key reason to sell the market. India trades at a 50% premium to EM above its five-year trailing average.
Growth is likely to slow down given high base effect…: To top that, it seems that growth is slowing down as the base gets higher. The latest IIP growth numbers highlight this issue. We are expecting broad market earnings growth to slow down to an average of around 25% in the coming 12 months.
…And market correlations with the rest-of-the world remain high: India’s high external deficit, funded largely by portfolio flows, makes the economy and the market vulnerable to any big risk- aversion event.
However, growth is anemic elsewhere…: That said, it is difficult to find a growth story like India. India’s GDP growth could be twice as much as the global average in the coming years.
…And surely not with India’s low cyclicality: More important, this growth is likely to come with lower cyclicality. 2009 vindicates this point. India’s earnings growth was almost close to zero even as global earnings fell by over 40%.
…Or with India’s return on capital: Significantly, for equity investors, India is delivering growth with a high a ROE as well.
The market seems to have priced in the coming growth slowdown: It is interesting to note that the market seems to be pricing in the coming growth slowdown just the way it priced in the growth acceleration in 2009. To that extent, any growth slowdown may not affect market performance.
RBI’s exit may remain measured…: Given its concerns about the world, we believe that the RBI may raise rates in a measured fashion, creating an extended period of low real rates. A combination of low real rates and strong growth is recipe for robust equity markets. A benign world could add fuel to the fire. The flip side is the associated inflation risk – keep an eye on that.
…And the government is acting: The government continues deliver on reforms and infrastructure lending upside risk to growth.
Sentiment remains tepid, conviction levels low: Our proprietary indicators suggests dull or range-bound markets in the near term.
Market outlook – more upside than downside risk: We continue to believe that investors should buy the dips in India with an expected return of around 23% to the end of 2011. We are overweight Energy, Industrials, Materials, and Telecoms, and underweight Healthcare, Utilities, Cons. Discretionary, Financials an Technology. Our focus is on sectors with attractive valuations, reasonable earnings momentum and a negative consensus view.
M O R G A N S T A N L E Y R E S E A R C H
August 2010India Strategy Chartbook
4
The Push and Pulls of the World
Source: Morgan Stanley Research
M O R G A N S T A N L E Y R E S E A R C H
August 2010India Strategy Chartbook
5
Developed Europe (Indexed, 100=Lehman Crisis 15 S ep-08)
0200400600800
1000120014001600180020002200
Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10
France GermanyGreece P ortugalSpain UK
Libor-OIS: No Liquidity Crunch
Growth Scare: Falling Long Bond Yields
Debt/Sovereign Stress: Spreads Are Elevating
Risk Aversion: Gold Prices at New Highs
Gold Price (US$ Per Ounce)
200
400
600
800
1,000
1,200
Apr-9
1
Feb
-92
Dec
-92
Oct
-93
Aug
-94
Jun-
95
Apr-9
6
Feb
-97
Dec
-97
Oct
-98
Aug
-99
Jun-
00
Apr-0
1
Feb
-02
Dec
-02
Oct
-03
Aug
-04
Jun-
05
Apr-0
6
Feb
-07
Dec
-07
Oct
-08
Aug
-09
Jun-
10
Libor -OIS Spre ad
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
Apr-
02
Sep-
02
Jan-
03
Jun-
03
Oct
-03
Mar
-04
Jul-0
4
Dec
-04
Apr-
05
Sep-
05
Jan-
06
Jun-
06
Oct
-06
Mar
-07
Jul-0
7
Dec
-07
Apr-
08
Sep-
08
Jan-
09
Jun-
09
Oct
-09
Mar
-10
Aug-
10
%
Source: Datastream, Bloomberg,CBC, Morgan Stanley Research
Risk Signposts: Market Participants Reticent About Risk
10 YEAR BOND YIELDS
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
7.0
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
%
G6 BO NDS*
U S 10Y R
EURO-ZONE, JAPAN, UK, CANADA; GDP-PPP WEIGHTS
M O R G A N S T A N L E Y R E S E A R C H
August 2010India Strategy Chartbook
6
9899
100101102103104105106107108109110
1-Fe
b-10
1-M
ar-1
0
1-Ap
r-10
1-M
ay-1
0
1-Ju
n-10
1-Ju
l-10
1-Au
g-10
India's perform ance relative to EM since Feb 2010
India’s Low-beta Response Puts It at Risk…India is Outperforming Emerging Markets
Source: FactSet, MSCI, Morgan Stanley Research
M O R G A N S T A N L E Y R E S E A R C H
August 2010India Strategy Chartbook
7
…But Indian Equities Still Have Some Catching Up to DoIndia Has Underperformed Emerging Markets Since 2008
Source: FactSet, MSCI, Morgan Stanley Research
- 4 0 %- 3 5 %- 3 0 %- 2 5 %- 2 0 %- 1 5 %- 1 0 %
- 5 %0 %5 %
1 0 %
Jan-
08
Apr-
08
Jul-0
8
Oct
-08
Jan-
09
Apr-
09
Jul-0
9
Oct
-09
Jan-
10
Apr-
10
Jul-1
0
M S C I In d ia Re la t iv e t o M S C I EM
M O R G A N S T A N L E Y R E S E A R C H
August 2010India Strategy Chartbook
8
The Problem Is that Valuations Are Fair at Best
810121416182022242628303234
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
2.0MSCI India PE MSCI India PE Relative to MSCI EM - RS
Relative Valuations are Getting Rich
Source: FactSet, MSCI, Morgan Stanley Research
M O R G A N S T A N L E Y R E S E A R C H
August 2010India Strategy Chartbook
9
Source: CEIC, Company data, Morgan Stanley Research
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
Mar
-96
Mar
-97
Mar
-98
Mar
-99
Mar
-00
Mar
-01
Mar
-02
Mar
-03
Mar
-04
Mar
-05
Mar
-06
Mar
-07
Mar
-08
Mar
-09
Mar
-10
Mar
-11
Mar
-12
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
70%
Earnings Grow th Le ading Indicator (Re al IIP grow th * (e x food CPI -WPI)-LS
Broad market Earnings Grow th (ex Energy)-RS
Growth Is Likely to Slow Down Given High Base Effect…Our Proprietary Earnings Growth Leading Indicator Points to Slower Broad Market Earnings Growth
MS Forecasts
M O R G A N S T A N L E Y R E S E A R C H
August 2010India Strategy Chartbook
10
…And Market Correlations with the Rest of the World Remain High
SPX - S&P 500 vs. MSCI India-50%
-30%
-10%
10%
30%
50%
70%
90%
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
12M rolling correlation of w eekly returns MSCI China vs. MSCI India
India’s External Deficit Is Source of Risk
Source: FactSet, MSCI, Morgan Stanley Research
M O R G A N S T A N L E Y R E S E A R C H
August 2010India Strategy Chartbook
11
Source: CSO, IMF Estimates, Morgan Stanley Research
-2
0
2
4
6
8
10
12
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
YoY GDP growth (%)India
World
India’s Superior and Balanced Growth Likely to Continue
However, Growth Is Anemic Elsewhere…
M O R G A N S T A N L E Y R E S E A R C H
August 2010India Strategy Chartbook
12
Source: Worldscope, FactSet, Morgan Stanley Research
India’s Earnings: Lower Cyclicality
-50%-40%-30%-20%-10%
0%10%20%30%40%50%60%70%
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
A s iaPac ex Japan
Ind ia
A C World
M SCI
EM
…And Surely Not With India’s Low Cyclicality
M O R G A N S T A N L E Y R E S E A R C H
August 2010India Strategy Chartbook
13
Source: Worldscope, FactSet, Morgan Stanley Research
India’s ROE Superiority vs. the Globe…Or With India’s Return on Capital
0%
5%
10%
15%
20%
25%
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
ROE Trend
India
EM
World
Asia Pac ex-Japan
BRIC
M O R G A N S T A N L E Y R E S E A R C H
August 2010India Strategy Chartbook
14
The Market Seems to Have Priced in Growth Slowdown
Source: Bloomberg, Morgan Stanley Research
Second Order Growth Derivative Fall in the Price?
-80%
-60%
-40%
-20%
0%
20%
40%
60%
80%
100%
120%
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
0%
5%
10%
15%
20%
25%
30%
3M M A No m in al IIP g r o w th - RS
Y oY Sens ex Returns (pus hed f w d 6 months )
MS f o rec as t f o r nomina l IIP
M O R G A N S T A N L E Y R E S E A R C H
August 2010India Strategy Chartbook
15
RBI’s Exit May Remain Measured…
Source: Bloomberg, Morgan Stanley Research
Low Real Rates Likely to Remain for Several Months
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Real Interest Rates (91 day yield- WPI)
MS Forecasts
M O R G A N S T A N L E Y R E S E A R C H
August 2010India Strategy Chartbook
16
…And the Government Is Acting
Source: NHAI, Morgan Stanley Research
Road Investments: Inflexion Point
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
Mar
-04
Jun-
05
Sep
-05
Jan-
06
Apr
-06
Jul-0
6
Nov
-06
Apr
-07
Aug
-07
Dec
-07
Apr
-08
Jul-0
8
Nov
-08
Feb-
09
Jun-
09
Sep
-09
Jan-
10
May
-10
Under implementation (in kms)
Roads under implementation are up
about 51% YoY
Recent reforms:1) Fertilizer price reform2) Gas price rationalization3) Fuel price decontrol4) Fiscal consolidation - 3G auction helps5) Tax reforms6) Proposed FDI liberalization in Media/Retail
M O R G A N S T A N L E Y R E S E A R C H
August 2010India Strategy Chartbook
17
Sentiment Remains Tepid…
- 5 0 %
- 3 0 %
- 1 0 %
1 0 %
3 0 %
5 0 %
7 0 %
9 0 %
1 1 0 %
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
S e n s e x v s . S e n s e x 2 0 0 DM A
Sensex Drops Below 200DMA during Bull Markets
Source: Bloomberg, Morgan Stanley Research
Sensex: Drops Below 200DMA During Bull Markets
Year days below 200DMA Max. drop
1983 55 -6.3%
1990 36 -9.8%
2004 87 -13.1%
2006 5 -7.8%
2010 12 -4.4%
M O R G A N S T A N L E Y R E S E A R C H
August 2010India Strategy Chartbook
18
…Conviction Levels Low
- 1 6 %
- 1 4 %
- 1 2 %
- 1 0 %
- 8 %
- 6 %
- 4 %
- 2 %
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
9 9 % / O n e -w e e k V a R fo r B S E S e n se x
Value-at-Risk Points to Growing Risk of a Sharp Sell-off but Timing Is Uncertain and Could Take Several Months
Source: Bloomberg, Morgan Stanley Research
M O R G A N S T A N L E Y R E S E A R C H
August 2010India Strategy Chartbook
19
18,226
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
20,000
22,000
24,000
26,000
28,000
30,000
Aug-08 Dec-08 Apr-09 Aug-09 Dec-09 Apr-10 Aug-10 Dec-10 Apr-11 Aug-11 Dec-11
23647 (+30%)
18,570 (+2%)
14393 (-21%)
26727 (+47%)
21115 (+16%)
16983 (-7%)
BSE Sensex: Scenario Analysis for Indian Equities*
Source: Morgan Stanley Research
*Sensex level as on 26/Aug/2010
Our probability-weighted outcome for the Sensex is 19,400 and 22,100 for Dec-10 and Dec-11 implying 8% and 23% upside, respectively.
BSE Sensex Outlook: More Upside than Downside Risk
Watch Out for:
Domestic Global
Equity Issuances Global growth
Oil Prices Fed moves
Reforms Sovereign Spreads
Inflation/RBI Policy US Long Yields
Domestic Growth EM multiples
Long Bonds Gold
Infra Spend China Growth & CNY
Probability-weighted outcome for Dec-2011: 22,100Probability-weighted outcome for Dec-2010: 19,400
M O R G A N S T A N L E Y R E S E A R C H
August 2010India Strategy Chartbook
20
Index Target: 23% Upside to Dec-11
Our residual income model projects a fair value of 18,570 for December 2010. Our bull case (25% probability) implies 30% upside and our bear case (10% probability) implies 20% downside.
Our residual income model projects a fair value of 21,115 for December 2011. Our bull case (25% probability) implies 48% upside and our bear case (10% probability) implies 7% downside.
The probability-weighted outcome for the BSE Sensex is 19,400 for December 2010, 8% above the current level. The probability-weighted outcome for the BSE Sensex is 22,100 for December 2011, 23% above the current level.
Our base case calls for:
– Fiscal consolidation
– Policy initiatives in FDI, infrastructure, tax and deregulation
– A steady global situation and reasonable capital flows
– No sudden spike up in crude oil prices
– A slow exit by the RBI through 2010 and
– Moderate equity supply.
Scenario Analysis
We assign a 65% probability to our base case, a 10% probability to our bear case, and a 25% probability to our bull case.
Our base case calls for fiscal prudence, policy initiatives in FDI, infrastructure, taxation and deregulation, a steady improvement in the global situation with no sudden spike up in crude oil prices and reasonable capital flows, a slow exit by the RBI through 2010, and moderate equity supply (less than US$25bn).
Our bear case assumes weak policy action, a fragile global situation, supply shock in crude oil prices causing a rapid increase in policy rates, and/or excessive equity issuances. Sensex earnings growth falls to 13% and 12% for F2011 and F2012, respectively.
Our bull case assumes global calm and a measured recovery in global growth, strong domestic policy action, range-bound crude oil prices, delayed exit by the central bank, and very slow increase in equity supply. Sensex earnings growth rises to 28% and 22% for F2010 and F2011, respectively.
M O R G A N S T A N L E Y R E S E A R C H
August 2010India Strategy Chartbook
21
Sector Model Portfolio/Focus List: OW Energy, Industrials, Materials, Telecoms
Past performance is no guarantee of future results. Results shown do not include transaction costs. Source: FactSet, MSCI, Bloomberg, Morgan Stanley Research
Focus List
-60%
-40%
-20%
0%
20%
40%
60%
80%
Aug-
07
Oct
-07
Dec
-07
Feb-
08
Apr-
08
Jun-
08
Aug-
08
Oct
-08
Dec
-08
Feb-
09
Apr-
09
Jun-
09
Aug-
09
Oct
-09
Dec
-09
Feb-
10
Apr-
10
Jun-
10
Aug-
10Por tfo lio cum ulative pe r for m ance
MSCI India cumulative perf ormance (LS)
SectorMSCI
Weight (%)
Portfolio Weight
(%)
Over/Under - Weight (bps)
Perf Rel. To MSCI India
(YTD)
Perf Rel. To MSCI India
(12M)
MSCI India 3% 17%
Consumer Disc. 4.9 3.9 -100 7% 17%
Consumer Staples 5.9 5.9 0 11% 3%
Energy 14.4 16.4 200 -9% -15%
Financials 27.4 26.4 -100 11% 6%
Healthcare 3.7 1.7 -200 1% 19%
Industrials 10.2 12.2 200 0% -2%
Technology 16.8 15.8 -100 3% 14%
Materials 10.4 12.4 200 -14% 1%
Telecoms 0.7 1.7 100 -6% -44%
Utilities 5.5 3.5 -200 -14% -19%
Cash - -
Sector Model Portfolio Performance vs. MSCI India
India Sector Model Portfolio
YTD Perf 12m Perf
Cairn India Energy CAIR IN NA 344 14 26 18% 13%
Reliance Ind Energy RIL IN EW 968 68 108 -14% -19%
DLF Financials DLFU IN OW 311 12 44 -17% -33%
SBI Financials SBIN IN OW 2,824 39 98 20% 38%
Ranbaxy Healthcare RBXY IN OW 484 4 9 -10% 20%
Jaiprakash Asso. Industrials JPA IN OW 116 5 25 -24% -33%
L&T Industrials LT IN OW 1,851 24 52 7% 0%
ACC Materials ACC IN OW 868 3 7 -4% -6%
Sesa Goa Materials SESA IN NA 322 6 70 -24% 23%
Bharti Telecoms BHARTI IN OW 317 26 46 -7% -34%
Adani Pow er Utilities ADANI IN OW 137 7 3 34% 14%
Reliance Infra Utilities RELI IN OW 1,013 5 44 -15% -24%
TickerAnalyst Rating
Price (Rs) 25/Aug/2010
Relative to MSCI IndiaAvg 3M T/O (US$ mn)
MCap (US$ bn)Stocks Sector
-60%
-40%
-20%
0%
20%
40%
60%
80%
Aug-
07
Oct
-07
Dec
-07
Feb-
08
Apr-
08
Jun-
08
Aug-
08
Oct
-08
Dec
-08
Feb-
09
Apr-
09
Jun-
09
Aug-
09
Oct
-09
Dec
-09
Feb-
10
Apr-
10
Jun-
10
Aug-
10
Fo cu s lis t cu m u lative p e r fo r m an ce
Sens ex c umulativ e perf ormanc e
Focus List Performance Since Launch
Please note performance of Cairn and Sesa Goa were considered up to 13 August 2010. Stocks ratings are not available. Please read detailed disclosures for more information.
M O R G A N S T A N L E Y R E S E A R C H
August 2010India Strategy Chartbook
22
Focus List Timeline Since Inception
Past performance is no guarantee of future results. Results shown do not include transaction costs. Source: FactSet, MSCI, Bloomberg, Morgan Stanley Research Please note performance of Cairn and Sesa Goa were considered up to 13 August 2010. Morgan Stanley & Co. Limited is acting as financial adviser and sponsor to Vedanta Resources PLC ("Vedanta") on Vedanta Group's proposed acquisition of 51% to 60% of Cairn India Limited ("Cairn India"), as announced on 16 August 2010. Morgan Stanley & Co. International plc. is also Corporate Broker to Vedanta.In accordance with its general policy, Morgan Stanley expresses no rating or price target on Vedanta, Cairn India, Cairn Energy PLC or Sesa Goa Ltd. This report and the information herein are not intended to serve as an endorsement of the proposed transaction.This report was prepared solely upon information generally available to the public. No representation is made that it is accurate and complete. This report is not a recommendation or an offer to buy or sell the securities mentioned. Please refer to the notes at the end of this report.
Date AddedDated
Removed
MSCI India (in Rs) on
date added
MSCI India (in Rs) on date
w hen removed or current
Stock price w hen Added
Price w hen removed or
current priceDividend
if anyStock return*
Returns relative to MSCI India
ACC 19-Aug-10 735 731 881 868 - -1% -1%Adani pow er 28-Apr-10 723 731 119 137 - 15% 14%Bharti Airtel 28-Apr-10 723 731 295 317 1 7% 6%Cairn India 22-Sep-09 669 731 263 355 - 35% 24%DLF 15-Jul-09 564 731 322 311 2 -3% -25%Jaiprakash Asso. 29-Nov-07 784 731 241 116 1 -52% -48%Larsen & Toubro 15-May-09 478 731 988 1851 14 87% 22%Ranbaxy Lab 1-Dec-09 683 731 469 484 - 3% -4%Reliance Industries 22-Aug-07 573 731 884 968 7 9% -14%Reliance Infra 15-Jul-09 564 731 1,104 1013 8 -8% -29%Sesa Goa 29-Jun-10 722 731 356 354 3 -1% -2%State bank of India 13-Aug-09 615 731 1,799 2824 40 57% 32%Arvind Ltd. 22-Aug-07 4-Dec-08 573 334 43 15 - -65% -41%Bharti Airtel 22-Aug-07 15-Jul-09 573 564 424 390 1 -8% -7%Cipla Ltd. 4-Dec-08 15-May-09 351 478 184 231 2 25% -8%GAIL (India) 22-Aug-07 29-Nov-07 573 784 199 279 10 40% 2%HDFC 22-Aug-07 29-Jun-10 573 711 1,901 2,902 34 53% 23%Hindustan Unilever 21-Aug-08 6-Nov-09 573 650 236 273 11 16% 2%Infosys Tech 29-Nov-07 1-Dec-09 784 683 1,570 2,395 27 53% 75%ITC 6-Nov-09 19-Aug-10 648 735 124 165 2 33% 17%Marico 22-Aug-07 15-May-09 573 478 58 63 1 9% 31%Maruti Suzuki 15-May-09 28-Apr-10 478 723 848 1,271 4 50% -1%ONGC 22-Aug-07 22-Sep-09 573 680 809 1,155 34 43% 20%Reliance Infra 22-Aug-07 29-Nov-07 573 784 725 1664 7 130% 68%Sobha Developers 27-Sep-07 21-Aug-08 687 583 856 264 8 -69% -64%Sun Pharmaceutical 22-Aug-07 15-Jul-09 573 564 922 1,216 12 32% 34%Tata Steel 22-Aug-07 21-Aug-08 573 583 503 589 13 17% 15%TCS 22-Aug-07 27-Sep-07 573 687 512 531 7 4% -14%Union Bank 22-Aug-07 13-Aug-09 573 615 126 213 5 70% 58%Zee Entertainment 21-Aug-08 28-Apr-10 571 723 209 303 2 45% 15%
M O R G A N S T A N L E Y R E S E A R C H
August 2010India Strategy Chartbook
23
Sector Rotation Model: Telecoms at the Top, Consumer Discretionary at the Bottom
Past performance is no guarantee of future results. Results shown do not include transaction costs. Source: FactSet, MSCI, IBES, Company Data, Morgan Stanley Research.
Priced on 25-Aug-2010
Rankings and FactorsConsumer
DiscretionaryConsumer
StaplesEnergy Financials Healthcare Industrials Information
TechnologyMaterials Telecoms Utilities
PERFORMANCE
1M Absolute Performance -2% 4% -6% 4% -1% 0% 0% -2% -13% -5%
12M Absolute Performance 37% 21% 0% 24% 39% 15% 34% 18% -35% -4%
12M Rel to EM Performance 14% -6% 4% 13% 24% 6% 25% 5% -33% -8%
Deviation from 200 DMA 7% 12% -3% 12% 3% 6% 6% -5% -3% -5%
VALUATIONS
PE Rel to MSCI India 0.8 1.4 0.9 1.2 1.1 1.5 1.0 0.7 0.3 0.9
PE Rel to MSCI India SD from Avg (0.7) (0.6) 0.7 1.2 (1.4) 1.4 (0.6) (0.0) (1.0) 0.7
PB Rel to MSCI India 1.6 2.4 0.7 0.9 1.6 1.4 1.8 0.7 0.2 0.8
PB Rel to MSCI India SD from Avg 1.4 (0.0) (0.8) 1.1 0.5 (0.6) (0.1) 0.1 (1.5) 0.6
Rel PE to EM Sector SD from Avg 0.2 (0.2) 1.7 1.3 (0.3) 1.3 (0.3) (0.1) (0.4) 1.3
Rel PB to EM Sector SD from Avg 0.3 (1.0) 0.2 (0.2) (1.5) (1.0) (0.8) (0.6) (1.7) (0.2)
EARNINGS
Earnings Revisions Breadth F2012 -6% -12% -10% -1% 2% 4% 44% -11% -37% -18%
3M Earnings Grow th Revision for F2012 1% 0% 3% 6% 0% 2% 0% 1% -2% 1%
Current ROE % of 5 yr Avg ROE 121% 75% 63% 82% 113% 64% 93% 60% 68% 87%
CONSENSUS VIEW
Total Institutional ow nership position (bps) (15.7) 28.1 52.0 (25.8) (12.6) 14.2 (14.8) (11.4) (8.3) (5.7)
Consensus Rating % of Avg MS Cov 92% 97% 132% 154% 63% 173% 134% 76% -60% 140%
Rank Based on Cumulative Score 10 8 3 9 4 6 5 2 1 7
M O R G A N S T A N L E Y R E S E A R C H
August 2010India Strategy Chartbook
24
Politics: A Quiet Year Ahead
Party-wise Rajya Sabha seats SeatsUPA 87NDA 65Left 21Others consisting of 69Bahujan Samaj Party 18Independent 7Biju Janta Dal 6Samajwadi Party 5AIADMK 5Rasshtriya Janta Dal 4Telugu Desam Party 4Janta Dal (Secular) 1Others 10Nominated 9No of vacant seats 2Total Rajya Sabha Seats 244
Government : Taking Action
Source: Election commission, Parliament of India, Morgan Stanley Research
2010: Quiet Year for Politics
Rajya Sabha Arithmetic: A ChallengeResults from Past 19 Elections since End of 2007State Winning Party % of Seats won Who won?Gujarat BJP 65% IncumbentMeghalaya UDP 52% New PartyTripura CPI(M) 80% IncumbentNagaland NPF 43% IncumbentKarnataka BJP 49% New PartyRajasthan Congress 48% New PartyDelihi Congress 61% IncumbentMizoram Congress 80% New PartyChhattisgarh BJP 44% IncumbentMadhya Pradesh BJP 63% IncumbentJammu & Kashmir Nat. Conf. 52% New PartyAndhra Pradesh Congress 54% IncumbentOrissa BJD + Allies 74% IncumbentSikkim SDF 100% IncumbentGeneral Elections Congress 38% IncumbentMaharashtra Congress 50% IncumbentArunachal Pradesh Congress 70% IncumbentHaryana Congress 44% IncumbentJharkhand JMM+ BJP 56% Incumbent
State Election Due Incumbent Party
Bihar 2010 Janata Dal (U)
Assam 2011 Congress
Kerala 2011 Left Democratic Front
Tamil Nadu 2011 DMK + Allies
West Bengal 2011 Left Democratic Front
Fertilizer Policy 1) 10% hike in urea prices 2)Nutrient based subsidy 3)Subsidy to be paid to farmers directly
Gas Price Increase Govt. approved revision of administered gas price.
3G AuctionIn the budget, the government estimated it should be able to collect some US$7.8 billion (0.5% of GDP) from 3G license fees. How ever, the govt. f inally collected $22.9 Bn
DivestmentsThe Govt. has targeted to raise Rs400 bn (US$8.7 bn, 0.6% of GDP) from divestments in F2011 compared w ith an estimated Rs250 bn (US$5.4 bn, 0.4% of GDP) in F2010.
Road InfraGovernment expects infrastructure spending to rise to 8.4% in F2012 from 6.4% of GDP in F2008. Key areas w here infrastructure spending is rising are pow er, roads and telecom.
TaxGovernment plans to implement the consolidated nation w ide goods and services tax (GST) system, from April 1, 2011 and direct tax reforms as recommended in the direct reforms code (DTC) in F2012
Fuel Partial Fuel price deregulationCapital Markets Non promoter holding up to 25%Nuclear Energy Civil Nuclear Liability Bill approved by Lok Sabha
M O R G A N S T A N L E Y R E S E A R C H
August 2010India Strategy Chartbook
25
- 2 %
0 %
2 %
4 %
6 %
8 %
1 0 %
1 2 %
F199
0
F199
1
F199
2
F199
3
F199
4
F199
5
F199
6
F199
7
F199
8
F199
9
F200
0
F200
1
F200
2
F200
3
F200
4
F200
5
F200
6
F200
7
F200
8
F200
9
F201
0E
F201
1E
F201
2E
C e n t r a l F is c a l D e f ic it S ta te F is c a l D e f ic itIn te r g o v t T r a n s f e r s M a jo r o f f - b u d g e t ite m sC o m b in e d H e a d lin e D e f ic it *
a s % o f G D P
Macro: Growth Momentum Continues Although High Base Effect Is in Play
Source: CEIC, Morgan Stanley Research
Strong Industrial Production
India’s Monetary Policy Exit India’s Fiscal Policy Exit
Seasonally Adjusted IIP
Note: *Here the off-budget items include expenditure on food, fertilizer and oil. E = Morgan Stanley Research estimates. Source: RBI, Economic Survey, Ministry of Finance, Morgan Stanley Research
0 %
3 %
6 %
9 %
1 2 %
1 5 %
1 8 %
Jan-
02
Jul-0
2
Jan-
03
Jul-0
3
Jan-
04
Jul-0
4
Jan-
05
Jul-0
5
Jan-
06
Jul-0
6
Jan-
07
Jul-0
7
Jan-
08
Jul-0
8
Jan-
09
Jul-0
9
Jan-
10
Y o Y % Y o Y % , 3 M M A
200
225
250
275
300
325
Jan-
05
Jul-0
5
Jan-
06
Jul-0
6
Jan-
07
Jul-0
7
Jan-
08
Jul-0
8
Jan-
09
Jul-0
9
Jan-
10
Seas ona lly ad jus ted IIP w as la rge ly f la t be tw een Marc h 2008 and Marc h 2009
2%
3%
4%
5%
6%
7%
Jul-0
1
Jan-
02
Jul-0
2
Jan-
03
Jul-0
3
Jan-
04
Jul-0
4
Jan-
05
Jul-0
5
Jan-
06
Jul-0
6
Jan-
07
Jul-0
7
Jan-
08
Jul-0
8
Jan-
09
Jul-0
9
Jan-
10
Jul-1
0Revers e Repo Rate
M O R G A N S T A N L E Y R E S E A R C H
August 2010India Strategy Chartbook
26
Corporate Fundamentals: Macro Drivers Favor Strong but Slower Earnings Growth
Source: CEIC, Company data, Morgan Stanley Research, Morgan Stanley Estimates
Revenue Growth Gets Support from Nominal IP Macro Environment Favors Margins
EPS Growth Now Suffers from a High BaseBroad market - ex energy
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
70%
Jun-
99D
ec-9
9Ju
n-00
Dec
-00
Jun-
01D
ec-0
1Ju
n-02
Dec
-02
Jun-
03D
ec-0
3Ju
n-04
Dec
-04
Jun-
05D
ec-0
5Ju
n-06
Dec
-06
Jun-
07D
ec-0
7Ju
n-08
Dec
-08
Jun-
09D
ec-0
9Ju
n-10
Dec
-10E
Jun-
11E
Dec
-11E
BSE Se ns e x Cons titue nts
Ne t Profit Grow th
M S cove rage (e x-e ne rgy)
M S Top Dow n Fore cas t for BSE Se ns e x
0%
5%
10%
15%
20%
25%
30%
35%
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
0%
5%
10%
15%
20%
25%
30%MS Coverage Revenue Growth (Ex Energy)MS fo recasts
3MMA Nom inal IIP grow th - RS-5%
-4%
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
23%
24%
25%
26%
27%
28%
29%
30%
Inf lation ex food gap (CPI ex-food minus WPI ex-f ood)
Eb i tda m arg ins (Ex-energy) pushed beh ind 9 m onths - RS
EGLI Points to Slower Broad Mkt. Earnings Growth
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
Mar
-96
Mar
-97
Mar
-98
Mar
-99
Mar
-00
Mar
-01
Mar
-02
Mar
-03
Mar
-04
Mar
-05
Mar
-06
Mar
-07
Mar
-08
Mar
-09
Mar
-10
Mar
-11
Mar
-12
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
70%
Ear nings Grow th Le ading Indicator (Re al IIP gr ow th * (e x food CPI -WPI)-LS
Broad market Earnings Grow th (ex Energy )-RS
M O R G A N S T A N L E Y R E S E A R C H
August 2010India Strategy Chartbook
27
Corporate Fundamentals: Micro Factors also Favor Earnings Pricing Power Is Drops YoY but Likely to Recover
-4%
-3%
-2%
-1%
0%
1%
2%
3%
Jun-
01
Dec
-01
Jun-
02
Dec
-02
Jun-
03
Dec
-03
Jun-
04
Dec
-04
Jun-
05
Dec
-05
Jun-
06
Dec
-06
Jun-
07
Dec
-07
Jun-
08
Dec
-08
Jun-
09
Dec
-09
Jun-
10
Y oY C ha nge in G ros s M a rg ins - e x -E ne rgy, Te c h , Te le c om s , F ina nc ia ls
Operating Leverage Is High
Growth Dispersion Suggests Broad-based Performance
-43%-41%-39%-37%-35%-33%-31%-29%-27%-25%-23%
Mar
-00
Sep-
00
Mar
-01
Sep-
01
Mar
-02
Sep-
02
Mar
-03
Sep-
03
Mar
-04
Sep-
04
Mar
-05
Sep-
05
Mar
-06
Sep-
06
Mar
-07
Sep-
07
Mar
-08
Sep-
08
Mar
-09
Sep-
09
Mar
-10
EBITDA M ar g in m inus Gros s M ar gin (e x Ene rgy, Te ch , Te le com , Financials ) for M S Cove r age
Balance Sheets in Fine Fettle
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
F199
2F1
993
F199
4F1
995
F199
6F1
997
F199
6F1
999
F200
0F2
001
F200
2F2
003
F200
4F2
005
F200
6F2
007
F200
8F2
009
F201
0EF2
011E
F201
2E
0%
5%
10%
15%
20%
25%
Cash to total capital employed (RS)
De bt to Equity (LS)
For M S Cove rage (e x-Financials )
0.5
1.5
2.5
3.5
4.5
5.5
6.5
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Earnings Grow th dis pe rs ion for M S Coverage
M S Cove rage Unive rs e
Consensus Estimates
Source: FactSet, IBES, Company data, Capitaline, Morgan Stanley Research
M O R G A N S T A N L E Y R E S E A R C H
August 2010India Strategy Chartbook
28
Corporate Fundamentals: Concentration of Earnings Is Not a Big Issue
Source: FactSet, BSE, Company Data, Morgan Stanley Research. *Sector Classification as per MSCI
Sectoral Earnings Concentration: Not Worse
Earnings Concentration Reducing into F2012
MS vs Consensus MS Consensus MS Consensus
Consumer Discretionary 65% 52% 19% 23% 4%Consumer Staples 14% 9% 13% 17% 1%Energy 35% 29% 18% 20% 2%Financials 17% 21% 36% 26% 2%Healthcare 64% 13% 11% 26% 15%Industrials 33% 35% 31% 34% -3%Materials 48% 49% 32% 22% 5%Technology 17% 22% 14% 15% -3%Telecommunications -27% -20% 17% 14% -3%Utilities 22% 19% 31% 25% 4%MS Coverage Universe 27% 26% 25% 22% 2%Sensex 24% 23% 22% 19% 2%
F2011E F2012E Diff in CAGR MS over Consensus CAGR (F10 to F12)
F2003 F2012e F2011e F2012eCons Disc 4% 6% 11% 7%Consumer Staples 6% 4% 2% 3%Energy 41% 25% 28% 23%Financials 19% 21% 17% 24%Healthcare 3% 2% 1% 3%Industrials 1% 6% 8% 9%Materials 5% 16% 25% 16%Technology 7% 9% 8% 6%Telecom 4% 4% -5% 2%Utilities 10% 7% 5% 8%
MS Universe 100% 100% 26% 22%
Consensus Estimates
Share in Agg. Net Profit Sector Contribution to GrowthC o n s e n s u s Gr o w th Es tim ate s - BSE Se n s e x EPS
0%
5%
10%
15%
20%
25%
30%
35%
40%
-12 -11 -10 -9 -8 -6 -5 -4 -3 -2 -1 0
F05
FO6
F07
F08
Months to end of FY
FO9F10
F11
Starting Point of F11 Earnings Not a Problem
MS Analysts More Optimistic vs. the Consensus
FY2011E FY2012E to Sensex FY2011E FY2012ETata Steel 22% 5% NTPC 2% 3%Reliance Ind. 16% 14% ITC Ltd. 2% 2%ONGC 13% 8% HDFC 2% 2%Tata Motors 11% 4% DLF Limited 1% 3%Sterlite Industries 4% 7% M&M 1% 1%BHEL 4% 4% Tata Pow er Co 1% 1%TCS 4% 3% Hero Honda 1% 1%ICICI Bank 3% 4% Reliance Infrastru 0% 1%Jindal Steel 3% 2% Cipla Ltd. 0% 1%HDFC Bank 3% 3% HUL 0% 1%Hindalco Ind. 3% 2% ACC Ltd. 0% 0%Wipro Ltd. 2% 2% Jaiprakash Ass. 0% 1%SBI 2% 10% Maruti Suzuki 0% 1%Larsen & Toubro 2% 4% Bharti -3% 3%Infosys 2% 4% Reliance Comm -4% 1%
Contribution to Sensex Earnings Growth (Consensus)
M O R G A N S T A N L E Y R E S E A R C H
August 2010India Strategy Chartbook
29
QE-Jun10 Earnings: Snapshot of MS Coverage Universe Earnings (102 companies)
Source: Company data, Capitaline, Morgan Stanley Research. The above analysis only includes companies where MS analyst have estimates. *Please note in Sensex earnings computation Tata Motors standalone earnings have been considered since our analyst did not issue expectations for consolidated profits.
YoY change
# Cos Rptd
earnings
#Cos beating earnings
expectationsMS Cov erage Sales EBITDA Net
ProfitEBITDA Margins
Sales EBITDA Net Profit EBITDA Margins
Chg in EBITDA
Mrgn (bps)
NP Growth v s. MS
estimates
14 5 Cons. Disc. 35% 50% 64% 15% 35% 34% 47% 14% (9) -17%8 7 Cons. Staples 13% 10% 7% 22% 15% 14% 14% 22% (18) 7%7 2 Energy 33% 11% -4% 12% 35% -45% -87% 6% (851) NM21 15 Financials 15% 20% 10% 54% 20% 30% 28% 56% 431 18%7 3 Healthcare 15% 48% 32% 23% 16% 60% 54% 24% 668 23%12 6 Industrials 22% 43% 36% 13% 12% 37% 28% 14% 246 -9%14 8 Materials 21% 34% 35% 27% 19% 51% 56% 31% 668 21%9 3 Technology 13% 11% 9% 26% 13% 8% 7% 25% (107) -1%5 4 Telecom 12% -5% -74% 31% 9% -8% -71% 31% (593) NM5 3 Utilities 4% 11% 2% 25% 8% 5% 0% 23% (65) -2%
102 56 Total (MS Cov) 24% 18% 5% 21% 24% 6% -10% 18% (316) -15%95 54 Total ex-Energy 17% 21% 8% 27% 16% 25% 16% 28% 194 8%74 39 Total ex-Fin 25% 18% 4% 17% 24% -1% -20% 15% (380) -24%
88 48 Total ex-Materials 24% 16% 0% 20% 25% -1% -21% 17% (432) -21%
81 46Total ex-Energy & ex-Materials 16% 18% 2% 27% 16% 19% 8% 28% 81 6%
90 50Total ex-Energy & ex-Telecom 18% 24% 19% 27% 17% 30% 29% 28% 272 9%
30 14 Sensex 28% 20% 5% 28% 27% 15% 2% 27% (279) -3%
28 14 Sensex ex-Energy 18% 16% 0% 27% 17% 17% 3% 28% 3 3%3038 Broad market 21% 8% 0% 20% (239)
3017Broad market Ex-energy 18% 20% 22% 24% 0
MS Estimates Actuals
Sector Profit Growth: Materials
lead while Energy and Telecom lag
Aggregate Earnings (ex-
Energy) ahead of expectations: up 16%
YoY
EBITDA Margins Margin expansion in 4
out of 10 sectors. Healthcare and
Materials lead while Energy and Telecom lag
Surprise Breadth: 56 out of
102 companies have beaten analyst
expectations
Sensex Profit Growth*: up 2 YoY, ex-energy up 3% YoY
Broad Market (ex- Energy)
outperforming narrow market, with 22% YoY profit growth
Revenue Growth: 24% for MS
coverage and 21% broad market
EBITDA Margins down 316bp YoY while up 194bp ex-Energy; down 239bp for broad market and unchanged
for broad market ex- Energy
Sector Surprise: Consumer Staples lead
expectations while Energy and Technology Lag
Broad Market: 3,038 companies
have reported earnings
M O R G A N S T A N L E Y R E S E A R C H
August 2010India Strategy Chartbook
30
QE-Jun10 Earnings: Broad Earnings (Ex-Energy) Growth @ 22% YoY Net Profit Growth: High Base Effect Comes Into PlayRevenue Growth: Slight Deceleration
Sectoral Earnings Trend: Industrials Lead, Energy Lags
- 4 0 %
- 2 0 %
0 %
2 0 %
4 0 %
6 0 %
8 0 %
Mar
-04
Jun-
04Se
p-04
Dec
-04
Mar
-05
Jun-
05Se
p-05
Dec
-05
Mar
-06
Jun-
06Se
p-06
Dec
-06
Mar
-07
Jun-
07Se
p-07
Dec
-07
Mar
-08
Jun-
08Se
p-08
Dec
-08
Mar
-09
Jun-
09Se
p-09
Dec
-09
Mar
-10
Jun-
10
Br o a d m a r k e t Ea r n in g s g r o w t h ( 1 3 6 3 c o m p a n ie s )
B r o a d ma r ke t Ea r n in g s g r o w th ( e x - e n e r g y )
-10%
0%
10%
20%
30%
40%
50%
Mar
-04
Jun-
04Se
p-04
Dec
-04
Mar
-05
Jun-
05Se
p-05
Dec
-05
Mar
-06
Jun-
06Se
p-06
Dec
-06
Mar
-07
Jun-
07Se
p-07
Dec
-07
Mar
-08
Jun-
08Se
p-08
Dec
-08
Mar
-09
Jun-
09Se
p-09
Dec
-09
Mar
-10
Jun-
10
Br o ad m ar k e t r e ve n u e g r o w th (1363 co m p an ie s )
Broad marke t r ev enue g row th (ex -ene rgy )
Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10Consumer Disc. -38% -2% 86% 325% 225% 31%Consumer Staples -10% 26% 36% 59% 26% -5%Energy 194% 28% NM 31% -27% -82%Financials -1% 28% 6% 5% 24% 28%Health Care -40% 35% 66% 62% 110% 10%Industrials -12% -6% 53% 225% 57% 50%Technology 9% 6% 9% 22% 15% 14%Materials -70% -38% -42% 89% 269% 47%Telecom 0% 5% -9% -21% -45% -53%Utilities 17% 28% 12% 33% 61% 24%Total 1% 3% 23% 43% 34% 2%Total (ex Energy) -23% -1% 0% 45% 63% 24%
Earnings at a New High
100
200
300
400
500
600
700
Mar
-04
Jun-
04Se
p-04
Dec
-04
Mar
-05
Jun-
05Se
p-05
Dec
-05
Mar
-06
Jun-
06Se
p-06
Dec
-06
Mar
-07
Jun-
07Se
p-07
Dec
-07
Mar
-08
Jun-
08Se
p-08
Dec
-08
Mar
-09
Jun-
09Se
p-09
Dec
-09
Mar
-10
Jun-
10
BSE Se n s e x
Br o ad m ar k e t (Ex -e n e r g y )
Broad marke t ( 1363 c os )
Ea rn ings Index ed to Dec -03
Source: Capitaline, Company data, Morgan Stanley Research
M O R G A N S T A N L E Y R E S E A R C H
August 2010India Strategy Chartbook
31
What’s the Consensus View: Flat Revisions Post June Qtr Earnings Season
Source: FactSet, IBES, Company data, Capitaline, Morgan Stanley Research
-40%
-30%
-20%
-10%
0%
10%
20%
30%
Jun-
06
Sep-
06
Dec
-06
Mar
-07
Jun-
07
Sep-
07
Dec
-07
Mar
-08
Jun-
08
Sep-
08
Dec
-08
Mar
-09
Jun-
09
Sep-
09
Dec
-09
Mar
-10
Jun-
10
Exce s s / (De f ic it ) o f A ctu a l Ne t Pr o f it vs . M S A n alys t Es t im ate s fo r M S co ve r ag e u n ive r s e
QE Jun-10 Earnings Lower than MS Expectations Consensus Revisions: +ve Industrials, -ve Materials
SectorNo. of
companiesGrowth Revision Downwards Upwards
Consumer Disc 17 -1.1% 29% 47%Consumer Staples 11 -0.3% 36% 64%Energy 9 -0.4% 33% 56%Financial 23 1.2% 39% 52%Healthcare 8 0.1% 75% 25%Industrials 11 5.5% 45% 45%Materials 15 -2.8% 60% 33%Technology 10 1.4% 80% 20%Telecom 5 -1.4% 20% 60%Utilities 5 -0.8% 40% 60%MS Coverage 114 0.0% 46% 46%
% no of CompaniesF2011
2 5%
3 0%
3 5%
4 0%
4 5%
5 0%
5 5%
6 0%
6 5%
7 0%
7 5%
Jun-
06
Sep-
06
Dec
-06
Mar
-07
Jun-
07
Sep-
07
Dec
-07
Mar
-08
Jun-
08
Sep-
08
Dec
-08
Mar
-09
Jun-
09
Sep-
09
Dec
-09
Mar
-10
Jun-
10S u r p r is e Br e a d th % o f C o m p an ie s Be a t in g M S Exp e c ta t io n s
MS Coverage: Breadth Down QoQ But Still Positive
-100%
-50%
0%
50%
100%
150%
200%
250%
300%
-100% -50% 0% 50% 100% 150% 200%
X A xis : % Diffe r e n ce in A ctu als an d M S Es tim ate s
Y A xis : Yo Y Ne t Pr o f it Gr o w th fo r M S C o ve r ag e C o m p an ie s
Biggest +ve Surprises in the Fastest Growing Cos.
M O R G A N S T A N L E Y R E S E A R C H
August 2010India Strategy Chartbook
32
What’s the Consensus View: Consensus Revises Sensex Earnings Down
Major Negative
Minor Negative
No Surprise
Minor Positive
Major Positive
ACCBHELDLFHero HondaInfosysJaiprakash AssoMarutiNTPCONGCCiplaHDFC BankHindalcoJindal SteelL&TICICIRelianceHDFCSterliteTCSBhartiHULITCM&MReliance CommReliance InfraSBITata MotorsTata Pow erTata SteelWipro
QE Jun-10 Actual Earnings vs. MS Expectations for Sensex Components
BSE Se n s e x co n s e n s u s EPS g r o w th
-5%
0%
5%
10%
15%
20%
25%
30%
Aug-
07
Nov
-07
Feb-
08
May
-08
Aug-
08
Nov
-08
Feb-
09
May
-09
Aug-
09
Nov
-09
Feb-
10
May
-10
Aug-
10
F2010E EPS - 901 F2011E EPS - 1109
F2012E EPS - 1318
MS Top dow n f orec as tsF11e 22%F12e 18%
Sensex Consensus EPS Est. Revised Down by @ 2%
MS Top-down Sensex EPS EstimatesBSE Sensex EPS F11E F12E
MS Top Down EPS Estimates:
Bear Case 1018 1140
EPS Growth 13% 12%
Base Case 1099 1297
EPS Growth 22% 18%
Bull Case 1153 1407
EPS Growth 28% 22%
Consensus EPS Estimates: 1109 1318
EPS Growth 23% 19%
Source: FactSet, IBES, Company data, Morgan Stanley Research
M O R G A N S T A N L E Y R E S E A R C H
August 2010India Strategy Chartbook
33
What’s the Consensus View: Watch Earnings Revisions Breadth
E = Morgan Stanley Research estimates
Source: FactSet, MSCI, IBES estimates, Company data, Morgan Stanley Research
Earnings Revisions Breadth Taking a Breather…A n alys t Re v is io n s -L S
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
Feb-
01
Aug-
01
Feb-
02
Aug-
02
Feb-
03
Aug-
03
Feb-
04
Aug-
04
Feb-
05
Aug-
05
Feb-
06
Aug-
06
Feb-
07
Aug-
07
Feb-
08
Aug-
08
Feb-
09
Aug-
09
Feb-
10
Aug-
10
MSCI Ind ia ( y oy , Rs )
-60%
-40%
-20%
0%
20%
40%
60%
80%
1 00%
1 20%
R e fle xivity in co rp o ra te e a rn in g s o u tlo o k a n d s h a re p rice
...And Getting to Levels that May Hurt Share Prices
-80%
-60%
-40%
-20%
0%
20%
40%
60%
80%
100%
120%
-40% -30% -20% -10% 0% 10% 20% 30% 40%
MSCI India Y -o-Y Returns (Y A x is )
A n alys t Re vis io n s (X A xis )
C u r r e n t L e ve l
F11 Current 1W 1M 3M 1W 1M 3M
CD 14% 14% 13% 17% 0.0% 0.6% -2.7%
CS 11% 11% 12% 14% 0.0% -0.8% -2.4%
Energy 31% 31% 34% 32% -0.4% -3.3% -1.4%
Financials 35% 35% 35% 37% -0.1% 0.0% -2.1%
Healthcare 25% 25% 26% 41% 0.2% -1.0% -15.3%
Industrials 99% 97% 88% 74% 2.0% 10.3% 25.0%
IT 23% 23% 23% 20% 0.0% 0.1% 2.6%
Materials 65% 65% 68% 70% 0.2% -2.7% -4.3%
Telecoms -41% -39% -28% -25% -1.4% -12.4% -15.6%
Utilities 9% 9% 11% 12% -0.3% -2.3% -3.5%
Earnings RevisionEPS Earnings Growth (MSCI India constituents)
F12 Current 1W 1M 3M 1W 1M 3M
CD 14% 14% 14% 13% 0.0% 0.3% 1.3%
CS 15% 15% 15% 15% 0.1% 0.3% 0.4%
Energy 21% 20% 19% 18% 0.3% 2.1% 3.0%
Financials 27% 27% 21% 21% 0.0% 5.8% 5.6%
Healthcare 25% 25% 27% 25% -0.4% -2.0% -0.1%
Industrials 34% 33% 34% 33% 1.2% 0.9% 1.7%
IT 10% 10% 9% 10% 0.0% 0.3% 0.0%
Materials 22% 22% 21% 21% 0.1% 0.4% 0.7%
Telecoms 16% 16% 16% 18% 0.6% 0.5% -2.0%
Utilities 15% 15% 15% 14% 0.2% -0.2% 0.6%
Earnings RevisionEPS Earnings Growth (MSCI India constituents)
M O R G A N S T A N L E Y R E S E A R C H
August 2010India Strategy Chartbook
34
Corporate Fundamentals: Demand Side Supportive of Capex Trough
Source: CSO, PPAC, Company data, Morgan Stanley Research E: Morgan Stanley estimates
Trade Deficit Is a ConcernOutput Gap Is Closing
90
110
130
150
170
190
210
230
250
Sep-
99
Mar
-00
Sep-
00
Mar
-01
Sep-
01
Mar
-02
Sep-
02
Mar
-03
Sep-
03
Mar
-04
Sep-
04
Mar
-05
Sep-
05
Mar
-06
Sep-
06
Mar
-07
Sep-
07
Mar
-08
Sep-
08
Mar
-09
Sep-
09
Mar
-10
Gross capital formation
Seasonally adjus ted IIP
s
Private Capex Has Collapsed Decline in Capex Was Broad-based
- 6 0 %
-4 0 %
-2 0 %
0 %
2 0 %
4 0 %
6 0 %
8 0 %
1 0 0 %
1 2 0 %
F199
4
F199
5
F199
6
F199
7
F199
8
F199
9
F200
0
F200
1
F200
2
F200
3
F200
4
F200
5
F200
6
F200
7
F200
8
F200
9E
F201
0E
F201
1E
F201
2E
-
1 .0
2 .0
3 .0
4 .0
5 .0
6 .0
Y o Y c h a n g e in c a p ita l s p e n d in g f o r MS c o v e ra g e - L S
Ca p e x / De p re c ia tio n f o r MS c o v e ra g e u n iv e r s e - RS
Capex to DepAvg F93 to F07 F2007 F2010E F2011E
Change (F11 over
F07)
Cons. Staples 1.93 3.44 2.22 1.89 -45%
Cons. Disc. 1.55 5.24 1.94 1.76 -66%
Energy 1.74 3.93 1.55 2.31 -41%
Healthcare 2.48 4.00 0.90 1.57 -61%
Industrials 1.92 5.17 3.74 5.24 1%
Materials 1.32 2.94 2.25 3.51 20%
Technology 1.28 2.52 1.05 1.74 -31%
Telecom 1.16 4.97 1.67 3.42 -31%
Utilities 1.59 4.74 6.53 7.50 58%
Total 1.63 4.18 2.31 3.24 -22%
-15%
-13%
-11%
-9%
-7%
-5%
-3%
-1%
Jan-
97Ju
l-97
Jan-
98Ju
l-98
Jan-
99Ju
l-99
Jan-
00Ju
l-00
Jan-
01Ju
l-01
Jan-
02Ju
l-02
Jan-
03Ju
l-03
Jan-
04Ju
l-04
Jan-
05Ju
l-05
Jan-
06Ju
l-06
Jan-
07Ju
l-07
Jan-
08Ju
l-08
Jan-
09Ju
l-09
Jan-
10Ju
l-10
Trailing 3M Trade Def ic it (as % of GDP, A nnualized)
M O R G A N S T A N L E Y R E S E A R C H
August 2010India Strategy Chartbook
35
Corporate Fundamentals: Supply-side Factors Favor Recovery in Capex
Source: RBI, DIPP, CMIE, Capitaline, Bloomberg, Morgan Stanley estimates, Morgan Stanley Research
Profits to GDP Approaching Its Previous High in 2012
Capital Is Cheap Capital Supply Likely to Rise
10%
12%
14%
16%
18%
20%
22%
24%
1994
1996
1998
2000
2002
2004
2006
2008
2010
Ear n in g s Y ie ld + 10 -ye ar t r e as u r y y ie ld
0 %
3 %
6 %
9 %
1 2 %
1 5 %
1 8 %
2 1 %
F199
4
F199
5
F199
6
F199
7
F199
8
F199
9
F200
0
F200
1
F200
2
F200
3
F200
4
F200
5
F200
6
F200
7
F200
8
F200
9E
F201
0E
F201
1E
T o ta l D o m e s t ic Is s u a n c e In c r e m e n ta l C r e d it In te r n a l a c c r u a l F o r e ig n Eq u ity is s u a n c e sEC B s F D I
A s % o f G D P2 0 .4 % o f G D P( U S $ 2 5 1 b n )
1 2 .2 % o f G D P( U S $ 3 9 b n )
Improving Appetite for Equity and Debt Issuances
0
5
1 0
1 5
2 0
2 5
3 0
3 5
4 0
4 5
5 0
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Eq u it y Is s u a n c e s
De b t Is s u a n c e s
1 2 M r o llin g is s u a n c e s (US $ b n )
0 %
1 %
2 %
3 %
4 %
5 %
6 %
7 %
8 %
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
e20
11e
2012
e
Ne t P r o f it f o r t h e In d ia n c o r p o r a t e sS h a r e i n G D P
M O R G A N S T A N L E Y R E S E A R C H
August 2010India Strategy Chartbook
36
Valuations: Neutral Territory on Both Absolute and Relative Basis
8
12
16
20
24
28
32
36
40
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
1
2
3
4
5
6
7MSCI India PE MSCI India PB - RS
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
2.0
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
1.0
1.2
1.4
1.6
1.8
2.0
2.2
2.4Price to earnings
Price to book- RS
MSCI India relative to MSCI EM:
LTA: PE (LS)
Sensex: Key Valuation Metrics*
Absolute Valuations: At Historical Averages Relative Valuations: Above Long-term Averages
( 3 . 0 )
( 2 . 0 )
( 1 . 0 )
-
1 . 0
2 . 0
3 . 0
4 . 0
1996
1997
1998
2000
2001
2002
2003
2004
2005
2006
2007
2008
2010
F e b 0 0
S e p 0 1A p r 9 9
A p r 0 3
J a n 0 4A p r F e b 0 7
C o m p o s i t e V a l u a t io n In d i c a t o r
M a r 0 9
J a n 0 8
Composite Valuation Indicator: Above Neutral Zone
BSE Sensex Current MedianCurrent / Median
Curr as SD from avg
P/E (trailing) 19.9 17.1 1.2 0.1
12m Fw d PE 14.7 13.4 1.1 0.3
P/B 2.6 2.4 1.1 0.2
Div yield 1.7% 2.1% 0.8 (0.7)
P/Cash 13.9 10.1 1.4 0.7
P/Sales 1.7 1.3 1.3 0.4
EV/EBITDA 11.1 10.7 1.0 (0.1)
Earnings yield-Bond yield -3.1% -3.3% 0.9 0.1
Bond yield - Div yield 4.4% 5.5% 0.8 (0.3)
Implied EPS grow th 12% 13% 1.0 (0.4)
Source: FactSet, MSCI, Bloomberg, Morgan Stanley Research
*Data as on 26/Aug/2010
M O R G A N S T A N L E Y R E S E A R C H
August 2010India Strategy Chartbook
37
Valuations: Long-term Investors May Reap Rewards
Equities Slightly Overvalued vs. Local Bonds
Broad Market Valuations Retracing Upwards Equities Commanding Fair Equity-risk Premium
Equity Valuations vs. Bonds: On the Edge
In d ia M ar k e t C ap to GDP
0%10%20%30%40%50%60%70%80%90%
100%110%120%130%140%150%160%
1993
1995
1997
1999
2001
2003
2005
2007
2009
0 %
10 %
20 %
30 %
40 %
50 %
60 %
70 %
80 %
90 %
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010V alu e as s ig n e d to fu tu r e g r o w th fo r M SC I In d ia In d e x
10 - y ear av erage = 48%
4 .0
4 .5
5 .0
5 .5
6 .0
6 .5
7 .0
7 .5
8 .0
Nov
-06
Feb-
07
May
-07
Aug-
07
Oct
-07
Jan-
08
Apr-
08
Jul-0
8
Sep-
08
Dec
-08
Mar
-09
Jun-
09
Aug-
09
Nov
-09
Feb-
10
May
-10
Jul-1
0
Eq u it y r is k p r e m iu m im p lie d b y o u r Re s id u a l in c o m e m o d e l
- 1 0 %
- 8 %
- 6 %
- 4 %
- 2 %
0 %
2 %
4 %
6 %
3445
3
3488
0
3530
7
3573
3
3616
0
3658
5
3701
1
3743
5
3786
2
3828
9
3871
6
3914
1
3956
8
3999
4
4041
6
L o n g - te r m a v e r a g e
Ea r n in g s Y ie ld G a p ( t r a ilin g e a r n in g s y ie ld m in u s 1 0 - y e a r t r e a s u r y y ie ld )
Source: FactSet, MSCI, Bloomberg, Morgan Stanley Research
M O R G A N S T A N L E Y R E S E A R C H
August 2010India Strategy Chartbook
38
Market Dynamics: Negative Delta in Liquidity
Commercial Banks: Peak Liquidity Behind Us Excess Money: Rapid Decline as Growth Picks Up
-2%
3%
8%
13%
18%
23%
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
-80%
-60%
-40%
-20%
0%
20%
40%
60%
80%
100%
120%Exce s s M on e y (M 3 gr ow th m inu s ind us tr ial g r ow th )
Y oY change in BSE Sensex (RS)
-15
-10
-5
0
5
10
15
20
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
-80%
-60%
-40%
-20%
0%
20%
40%
60%
80%
100%
120%Commercial bank liquidity proxy (credit growth minus deposit growth)
YoY change in BSE Sensex (RS)
%
91-day Yield: Indicator of Liquidity/Monetary Position
3456789
1011121314
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
%
Repo rate
91-day y ield
Re ve rs e re po rate
Liquidity Conditions Remain Tight
-2 0
-1 0
0
1 0
2 0
3 0
4 0
5 0
6 0
Jan-
07
Mar
-07
May
-07
Jul-0
7
Sep-
07
Nov
-07
Jan-
08
Mar
-08
May
-08
Jul-0
8
Sep-
08
Nov
-08
Jan-
09
Mar
-09
May
-09
Jul-0
9
Sep-
09
Nov
-09
Jan-
10
Mar
-10
May
-10
Jul-1
0
Ma rke t S ta b iliz a tio n S c he me + Ne t Repo B a la nc e (US $ bn )
Source: RBI, CEIC, FactSet, MSCI, Bloomberg, Morgan Stanley Research
M O R G A N S T A N L E Y R E S E A R C H
August 2010India Strategy Chartbook
39
Market Dynamics: Momentum Indicators Approach Neutral Territory
Source: FactSet, MSCI, Bloomberg, Morgan Stanley Research * Ongoing bull market
Market Momentum: No Longer in Sell Zone
Return Tails Approaching Neutral Zone 6M Trailing Momentum: Neutral Territory
Sensex Deviation from 200DMA: Correction May be Over
- 6 0 %
- 4 0 %
- 2 0 %
0 %
2 0 %
4 0 %
6 0 %
8 0 %
1 0 0 %
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
% o f s to c ks > 5 0 % r e tu r n s m in u s% o f s to c ks w ith r e tu r n s in + /- 1 0 % b a n d
- 8 0 %
- 6 0 %
- 4 0 %
- 2 0 %
0 %
2 0 %
4 0 %
6 0 %
8 0 %
1 0 0 %
1 2 0 %
1994
1996
1998
2000
2002
2004
2006
2008
2010
1 2 m - 1 m p e r f o r m a n c e f o r t h e S e n s e x
- 6 0 %
- 4 0 %
- 2 0 %
0 %
2 0 %
4 0 %
6 0 %
8 0 %
1 0 0 %
1 2 0 %
Jan-
94
Jan-
96
Jan-
98
Jan-
00
Jan-
02
Jan-
04
Jan-
06
Jan-
08
Jan-
10
6 M p e r f o r m a n c e f o r t h e S e n s e x
- 5 0 %
- 3 0 %
- 1 0 %
1 0 %
3 0 %
5 0 %
7 0 %
9 0 %
1 1 0 %
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
S e n s e x v s . S e n s e x 2 0 0 D M A
M O R G A N S T A N L E Y R E S E A R C H
August 2010India Strategy Chartbook
40
Market Dynamics: Derivatives Markets Giving Mixed Signals
VAR Suggesting Market Participants are Bullish Nifty Premium Suggests Market is Net Long
Buy VolatilityPut Call Ratio: Hedges Have Flattened
0 .1 0
0 .1 5
0 .2 0
0 .2 5
0 .3 0
0 .3 5
0 .4 0
0 .4 5
0 .5 0
0 .5 5
0 .6 0
Jun-
05
Oct
-05
Feb-
06
Jun-
06
Oct
-06
Feb-
07
Jun-
07
Oct
-07
Feb-
08
Jun-
08
Oct
-08
Feb-
09
Jun-
09
Oct
-09
Feb-
10
Jun-
10
Un w e ig h t e d p u t - c a ll r a t io ( 4 - w e e k m o v in g t o t a l)
-2 .4%
-1 .9%
-1 .4%
-0 .9%
-0 .4%
0 .1%
0.6%
1.1%
1.6%
2.1%
2.6%
Oct
-07
Nov
-07
Jan-
08
Feb-
08
Apr-
08
Jun-
08
Aug-
08
Sep-
08
Nov
-08
Jan-
09
Mar
-09
May
-09
Jun-
09
Aug-
09
Sep-
09
Nov
-09
Jan-
10
Mar
-10
Apr-
10
Jun-
10
Aug-
10
Nif ty 2 -m o n th fu tu r e s p r e m iu m-1 6 %
-1 4 %
-1 2 %
-1 0 %
-8 %
-6 %
-4 %
-2 %
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
9 9 %/O ne -w e e k V a R fo r B S E S e ns e x
0
20
40
60
80
100
120
Jan-
08
Apr-
08
Jul-0
8
Oct
-08
Jan-
09
Apr-
09
Jul-0
9
Oct
-09
Jan-
10
Apr-
10
Jul-1
0
Source: FactSet, MSCI NSE, ASA, Bloomberg, Morgan Stanley Research
M O R G A N S T A N L E Y R E S E A R C H
August 2010India Strategy Chartbook
41
Market Dynamics: Market Timing Is Neutral Zone
Market Timing Indicator: Just Above Neutral
Depth of Investor Activity Remains StrongMarket Breadth: Mixed Signals for Bulls
0 .8
1 .0
1 .2
1 .4
1 .6
1 .8
2 .0
Jun-
09
Jul-0
9
Aug-
09
Sep-
09
Oct
-09
Nov
-09
Dec
-09
Jan-
10
Feb-
10
Mar
-10
Apr-
10
May
-10
Jun-
10
Jul-1
0
Aug-
10
1 3 ,000
14 ,000
15 ,000
16 ,000
17 ,000
18 ,000
19 ,000
Sens ex - RS15 DM A o f A d v De c lin e Rat io
( 1 .5 )
( 1 .0 )
( 0 .5 )
-
0 .5
1 .0
1 .5
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
C o m p o s it e S en t im en t In d ica t o r
- 3
- 2
- 1
0
1
2
3
4
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
C V I + C S I
17%
19%
21%
23%
25%
27%
29%
31%
Mar
-09
Mar
-09
Apr-
09
May
-09
Jun-
09
Jul-0
9
Aug-
09
Aug-
09
Sep-
09
Oct
-09
Nov
-09
Dec
-09
Jan-
10
Feb-
10
Mar
-10
Mar
-10
Apr-
10
May
-10
Jun-
10
Jul-1
0
Aug-
10
2500
3000
3500
4000
4500
5000
5500
6000Nif ty Index - RS10 DM A NSE daily de live ry data
Composite Sentiment Indicator: Perched in Neutral Zone
Source: NSE, FactSet, MSCI, ASA, Bloomberg, Morgan Stanley Research
M O R G A N S T A N L E Y R E S E A R C H
August 2010India Strategy Chartbook
42
Market Dynamics: Institutional Ownership and Flows: Mixed Bag
Foreigners Raise Stakes
Domestic Mutual Funds Low Cash PositionsInstitutional Flows Have Been Choppy
0%
5%
10%
15%
20%
25%
Jan-
07
May
-07
Sep-
07
Jan-
08
May
-08
Sep-
08
Jan-
09
May
-09
Sep-
09
Jan-
10
May
-10
50
100
150
200
250
Cas h lev e ls o f the Mutua l f und Indus try (Rs bn) - RS
C as h h o ld in g s as % o f A s s e ts
-2,000
-1,000
0
1,000
2,000
3,000
4,000
5,000
Jan-
08Fe
b-08
Mar
-08
Apr-
08M
ay-0
8Ju
n-08
Jul-0
8Au
g-08
Sep-
08O
ct-0
8N
ov-0
8D
ec-0
8Ja
n-09
Feb-
09M
ar-0
9Ap
r-09
May
-09
Jun-
09Ju
l-09
Aug-
09Se
p-09
Oct
-09
Nov
-09
Dec
-09
Jan-
10Fe
b-10
Mar
-10
Apr-
10M
ay-1
0Ju
n-10
Jul-1
0
In s t itu t io n al f lo w s - USD m n
10%
12%
14%
16%
18%
20%
Sep-
01D
ec-0
1M
ar-0
2Ju
n-02
Sep-
02D
ec-0
2M
ar-0
3Ju
n-03
Sep-
03D
ec-0
3M
ar-0
4Ju
n-04
Sep-
04D
ec-0
4M
ar-0
5Ju
n-05
Sep-
05D
ec-0
5M
ar-0
6Ju
n-06
Sep-
06D
ec-0
6M
ar-0
7Ju
n-07
Sep-
07D
ec-0
7M
ar-0
8Ju
n-08
Sep-
08D
ec-0
8M
ar-0
9Ju
n-09
Sep-
09D
ec-0
9M
ar-1
0Ju
n-10
6%
7%
8%
9%
10%
11%
12%
13%
14%
15%FII holding in 1200 NSE listed stocks
Domestic Institutional Ow nership in 1200 NSE listed stocks - RS
Overall Institutional sector positions FIIs
Domestic financial
InstitutionsDomestic
Mutual Funds
Total Institutional
Holdings MSCI Weight*
Total Institutional Position over MSCI weight BSE 100
Cons Disc 5.3% 5.4% 4.5% 5.2% 5.2% 0.1% 5.3%
Cons Staples 5.3% 10.7% 14.8% 8.0% 5.8% 2.1% 7.0%
Energy 12.9% 16.1% 15.3% 14.1% 16.0% -1.9% 14.1%
Financials 32.9% 18.7% 18.9% 27.2% 24.9% 2.3% 25.7%
Healthcare 3.6% 3.1% 3.6% 3.5% 4.0% -0.5% 3.7%
Industrials 9.2% 14.3% 19.2% 11.8% 10.1% 1.7% 12.8%
Materials 8.5% 12.5% 5.4% 9.2% 10.4% -1.2% 10.9%
Technology 15.9% 5.3% 8.4% 12.0% 16.7% -4.7% 10.9%
Telecom 3.0% 3.3% 2.9% 3.1% 0.9% 2.2% 3.1%
Utilities 3.4% 10.6% 7.1% 5.9% 6.1% -0.2% 6.5%
Total Institutional Portfolio (Jun-10): OW Financials, U/W Tech
Source: SEBI, AMFI, Capitaline, FactSet, MSCI, Bloomberg, Morgan Stanley Research. Please note Institutions include FIIs, domestic insurance companies and domestic mutual funds * We use MSCI India Index as proxy benchmark
M O R G A N S T A N L E Y R E S E A R C H
August 2010India Strategy Chartbook
43
Market Dynamics: Buy-side Consensus (Jun-10) – Room for More Bullishness
Source: Morgan Stanley Research
MS View GEMS fund managerDomestic fund
managerInternational fund
managerLong Short fund
manager
India dedicated overseas fund
manager Aggregate
GDP growth 8.5% 8.1% 8.5% 8.4% 8.5% 8.7% 8.6%WPI (Inflation) 7.9% 7.7% 8.0% 8.4% 8.3% 8.4% 8.1%Policy rate 5.8% 6.2% 6.1% 6.0% 6.0% 6.1% 6.0%10-year bond yield NA 7.9% 7.7% 7.7% 7.7% 7.8% 7.7%Crude prices/barrel NA 75 75 78 74 75 76Currency view NA 45 45 46 46 46 45High point for Sensex in 2010 NA 19611 19362 19071 19367 18971 195352010 Year-end target for Sensex 19400 19056 18667 18536 18594 17853 18795Will India outperform Emerging markets in 2010? NA 22% 52% 21% 38% 29% 43%Current position on Indian equities? NA Overweight Overweight Overweight Equalweight Overweight OverweightSensex earnings growth 23% 21% 21% 19% 21% 21% 21%Broad market earnings growth NA 23% 23% 22% 23% 24% 23%Investment Horizon (months) NA 17 20 16 15 26 19
Best description of the Indian equity markets
Single most important driver for Indian equities
Biggest concernGlobal
Growth/Sovereign Debt/Inflation
Global Growth/Inflation Inflation Sovereign Defaults Sovereign Defaults
Sovereign Defaults
Best Performing sector Cons. Disc./Technology
Financials Materials Financials Consumer Discretionary
Financials
Worst Performing sector Materials Telecom Cons. Disc./Technology
Healthcare Telecom Telecom
Most preferred asset class Gold BSE Mid-cap index Cash Gold Gold BSE Mid-cap index
Least preferred asset class Real Estate Government Bonds/Cash
BSE Small-Cap index Crude Oil Crude Oil Crude Oil
<---------------------------------------------------------------------------------------------Global Markets--------------------------------------------------------------------------------------------------------->
Macro and Market view for F2011
Themes for 2010<----------------------------------------------------------------------------Stock picking is the best strategy for 2010--------------------------------------------------------------------------------->
M O R G A N S T A N L E Y R E S E A R C H
August 2010India Strategy Chartbook
44
High Net Worth Investors Survey (Jun-10)High Networth Investors Institutional
2010 Year end 10-year bond yield 7.7% 7.7%
High point for Sensex in 2010 19620 19535
2010 Year-end target for Sensex 19140 18795
Investment Horizon (months) 23 19
Best description of the Indian equity markets
Single most important driver for Indian equities
Biggest concern Inflation Sovereign Defaults
Best Performing sector
Worst Performing sector Materials Telecom
Most Preferred asset class
Least Preferred asset class Cash Crude Oil
<-----------------------------Financials---------------------------->
<----------------------BSE Mid Cap Index--------------------->
<------------------------Global Markets------------------------>
Macro and Market view for 2010
Themes for 2010Stock picking is the best strategy for rest of 2010
Source: Morgan Stanley Research
M O R G A N S T A N L E Y R E S E A R C H
August 2010India Strategy Chartbook
45
Consensus Is Positive on Macro, and on Stocks
Source: IBES, FactSet, Bloomberg, Morgan Stanley Research
Consensus Positive on the Economy…
Consensus Conviction Positive at the Aggregate Consensus Rating - The Upward Trajectory Continues
…But Appear less Gung-ho on Earnings
4.5
5.0
5.5
6.0
6.5
7.0
7.5
8.0
8.5
Apr-
07
Jul-0
7
Oct
-07
Jan-
08
Apr-
08
Jul-0
8
Oct
-08
Jan-
09
Apr-
09
Jul-0
9
Oct
-09
Jan-
10
Apr-
10
Jul-1
0
Ind ia GDP Gr ow th C o ns e n s us Fo r e cas ts
F2009
F2010
F2011
M S GDP fo r e cas tsF11e 8.5%F12e 8.4%
F2012
0.1
0.2
0.3
0.4
0.5
0.6
0.7
522
826
1,20
7
1,56
6
1,80
0
2,07
4
2,49
9
3,23
4
3,80
7
4,36
2
4,96
6
5,65
8
6,49
6
7,73
3
10,7
88
16,2
56
24,1
17
Market Cap (US $ million)
Consensus rating (approaching one implies strongest buy conviction)
BSE Se n s e x co n s e n s u s EPS g r o w th
-5%
0%
5%
10%
15%
20%
25%
30%
Aug-
07
Nov
-07
Feb-
08
May
-08
Aug-
08
Nov
-08
Feb-
09
May
-09
Aug-
09
Nov
-09
Feb-
10
May
-10
Aug-
10
F2010E EPS - 901 F2011E EPS - 1109
F2012E EPS - 1318
MS Top dow n f orec as tsF11e 22%F12e 18%
0.0
0 .1
0 .2
0 .3
0 .4
0 .5
0 .6
Jun-
06
Sep-
06
Dec
-06
Mar
-07
Jun-
07
Sep-
07
Dec
-07
Mar
-08
Jun-
08
Sep-
08
Dec
-08
Mar
-09
Jun-
09
Sep-
09
Dec
-09
Mar
-10
Jun-
10
- 60%
-40%
-20%
0%
20%
40%
60%
80%
100%M e an C o n s e n s u s Rat in g fo r M S co ve r ag e u n ive r s e
BSE Sens ex (6M f w d re tu rns ) - RS
M O R G A N S T A N L E Y R E S E A R C H
August 2010India Strategy Chartbook
46
Reliance Industries
Sell-Side Consensus Net Buy Ratio for Key Stocks
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
1.1
2001
2002
2003
2005
2006
2007
2009
2010
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
1.1
2001
2002
2003
2005
2006
2007
2009
2010
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
1.1
2001
2002
2003
2005
2006
2007
2009
2010
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
1.1
2002
2003
2004
2006
2007
2008
2010
-0.3
-0.2
-0.1
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
2007
2008
2009
2010
-1.1
-0.9
-0.7
-0.5
-0.3
-0.1
0.1
0.3
0.5
0.7
0.9
1.1
2001
2002
2003
2005
2006
2007
2009
2010
-0.3-0.2-0.10.10.20.30.40.50.60.70.80.91.01.1
2003
2005
2006
2007
2009
2010
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
1.1
2001
2002
2003
2005
2006
2007
2009
2010
-0.3-0.2-0.10.00.10.20.30.40.50.60.70.80.91.01.1
2001
2002
2003
2005
2006
2007
2009
2010
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
1.1
2001
2002
2003
2005
2006
2007
2009
2010
Maruti Suzuki Hindustan Unilever
Infosys TechnologiesLarsen &Toubro
State Bank of India Sun Pharmaceutical
Bharti AirtelTata Steel
DLF
Dark blue Line – Stock Consensus Rating, Light red line – Average of Total MS Coverage Ratings
Source: FactSet, MSCI, Morgan Stanley Research. Sector consensus rating is calculated as ratio of average net buy ratings of the sector constituents to the average number of ratings of the sector constituents.
M O R G A N S T A N L E Y R E S E A R C H
August 2010India Strategy Chartbook
47
3 ‘U’, 3 ‘O’ Screen: Stocks to “Overweight”*Best Stocks Filtered by US$2mn avg. trading value and MS analyst rating (out of 114 stocks covered by MS)
Grasim Aban Offshore ACC Bharti Airtel Hindalco UltraTech BPCL Ambuja Cement
Cipla Idea
PERFORMANCE
1M Absolute Performance 17% -1% 8% 5% 18% 10% 3% 15% -8% 6%
12M Absolute Performance -13% -24% 16% -22% 75% 32% 30% 29% 18% -11%
12M Rel to EM Performance -31% -40% -7% -38% 39% 5% 4% 2% -6% -29%
Deviation from 200 DMA -4% -23% 0% 5% 14% -3% 17% 13% -7% 16%
VALUATIONS
Absolute PE 6.3 10.7 10.3 13.1 8.6 10.5 12.8 15.5 22.5 24.3
PE SD from Avg -1.1 0.4 0.1 0.0 -0.6 -0.1 0.1 -0.3 -0.5 -0.5
Absolute PB 1.6 1.0 2.8 3.1 1.5 2.5 1.7 2.9 4.6 1.6
PB SD from Avg -0.6 -0.9 -0.5 -0.9 -0.4 -0.8 -0.3 -0.3 -0.7 -0.5
Rel PE to MSCI India SD from Avg -1.8 -0.9 -1.1 -1.2 -0.8 -0.6 -0.2 -0.8 -1.1 0.7
Rel PB to MSCI India SD from Avg -0.7 -1.0 -0.6 -1.1 -0.6 -1.0 -0.4 -0.1 -0.9 -0.9
EARNINGS
Earnings Revisions Breadth 13% -25% -17% -31% 7% -30% 19% 15% -25% 13%
3M Earnings Grow th Revision for F2011 -6% -29% 1% -8% 29% -2% 2% 5% -3% 6%
Current ROE % of 5 yr Avg ROE 99% 58% 102% 88% 130% 80% 122% 74% 100% 62%
CONSENSUS VIEW
Total Institutional ow nership position (bps) 8.7 -7.1 -0.7 -49.9 -9.4 -7.6 -0.3 0.3 -0.4 30.2
Consensus Rating % of Avg MS Cov 109% 10% -34% 103% 169% -30% 21% -54% -27% -40%
Rank Based on Cumulative Score 1 2 3 4 5 6 11 14 15 16
Share Price (19-Aug-2010) 2136 835 881 314 180 926 676 124 305 70
MS Analyst Rating Overweight Overweight Overweight Overweight Equal-Weight Overweight Overweight Overweight Equal-Weight Overweight
Source: FactSet, MSCI, IBES, Company Data, Morgan Stanley Research. Past performance is no guarantee of future results. Results shown do not include transaction costs.
Priced on 19-Aug-2010, * Please refer to report dated Aug 20, 2010 titled “Deep Value, Contrarian vs. Over-loved Stocks”
M O R G A N S T A N L E Y R E S E A R C H
August 2010India Strategy Chartbook
48
3 ‘U’, 3 ‘O’ Screen: Stocks to “Underweight”*
Indian Hotels Jain Irrigation IndusInd Bank Dabur Dr. Reddy's ITC Essar Oil Axis Bank IDFC Godrej Consumer
PERFORMANCE
1M Absolute Performance 2% 5% 10% -2% -9% 13% -5% 0% -4% 7%
12M Absolute Performance 74% 82% 148% 72% 68% 48% 2% 66% 43% 77%
12M Rel to EM Performance 39% 45% 98% 37% 33% 18% -19% 32% 14% 41%
Deviation from 200 DMA 8% 27% 34% 16% 7% 22% -4% 18% 12% 31%
VALUATIONS
Absolute PE NM 35.9 31.0 36.1 211.4 31.3 543.8 21.9 26.0 37.4
PE SD from Avg NM 51.1 35.2 1.2 1.9 1.9 1.7 26.8 36.0 1.3
Absolute PB 3.2 7.8 4.5 16.6 5.4 8.4 3.4 3.4 3.8 9.3
PB SD from Avg 0.5 0.3 2.8 0.9 -0.1 0.0 0.8 0.3 0.6 -1.1
Rel PE to MSCI India SD from Avg NM 0.8 1.2 0.4 1.6 1.0 5.0 0.5 1.4 1.2
Rel PB to MSCI India SD from Avg 1.4 1.4 3.6 1.5 -0.1 0.1 1.0 0.6 0.9 -1.3
EARNINGS
Earnings Revisions Breadth 0% -27% 67% 12% -17% 6% -25% 8% 0% 15%
3M Earnings Grow th Revision for F2011 -86% 32% 164% 1% -1% 2% 4% 15% -6% 28%
Current ROE % of 5 yr Avg ROE -106% 115% 158% 93% 43% 102% -16% 99% 105% 62%
CONSENSUS VIEW
Total Institutional ow nership position (bps) 0.3 4.3 3.9 9.3 -6.2 15.7 -0.3 25.6 -104.2 4.1
Consensus Rating % of Avg MS Cov 239% 127% 239% 35% 89% 185% 115% 182% 126% 206%
Rank Based on Cumulative Score 112 111 110 107 106 97 94 93 90 89
Share Price (19-Aug-2010) 107 1248 230 206 1340 165 131 1359 184 390
MS Analyst Rating Equal-Weight Equal-Weight Equal-Weight Equal-Weight Equal-Weight Equal-Weight Underweight Equal-Weight Equal-Weight Equal-Weight
Worst Stocks Filtered by US$ 2 m avg. trading value & MS analyst rating (out of 114 stocks covered by MS)
Source: FactSet, MSCI, IBES, Company Data, Morgan Stanley Research. Past performance is no guarantee of future results. Results shown do not include transaction costs.
Priced on 19-Aug-2010, * Please refer to report dated Aug 20, 2010 titled “Deep Value, Contrarian vs. Over-loved Stocks”
M O R G A N S T A N L E Y R E S E A R C H
August 2010India Strategy Chartbook
49
Double Dip & Sovereign Stress Haunting Global Equities
India Appears Joined at the Hip to World EquitiesKey Factor Driving Oil Correlation Is Capital Flows
Capital Flows: India’s High Octane Fuel
SPX - S&P 500 vs . M SCI India-50%
-30%
-10%
10%
30%
50%
70%
90%
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
12M rolling corre lation of w eek ly re turns M SCI China vs . M SCI India
-80%
-60%
-40%
-20%
0%
20%
40%
60%
80%
Jan-
05
May
-05
Sep-
05
Jan-
06
May
-06
Sep-
06
Jan-
07
May
-07
Sep-
07
Jan-
08
May
-08
Sep-
08
Jan-
09
May
-09
Sep-
09
Jan-
10
May
-10
( 1 ,500 )
(1 ,000 )
(500 )
-
500
1,000
1,500
12M r o llin g co r r e la t io n o f w e e k ly r e tu r n s (Oil vs . Se n s e x)
6M ave r ag e FII f lo w s (USD m n ) - RS (d o t te d lin e )
6M c rude o il re tu rns - LS
-4%
-3%
-2%
-1%
0%
1%
2%
3%
4%
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%T r ailin g 4Q - A s % o f GDP
C u r r e n t A cco u n t Balan ce
Capital f low s - RS2.02.22.42.62.83.03.23.43.63.84.04.24.4
Sep-
08O
ct-0
8N
ov-0
8D
ec-0
8Ja
n-09
Feb-
09M
ar-0
9Ap
r-09
May
-09
Jun-
09Ju
l-09
Aug-
09Se
p-09
Oct
-09
Nov
-09
Dec
-09
Jan-
10Fe
b-10
Mar
-10
Apr-
10M
ay-1
0Ju
n-10
Jul-1
0Au
g-10
-300
200
700
1200
1700
2200US 10 Y R Bond Y ield (LS) GREECE CDS USD SR 5YR (Inde xe d , 100 = Le hm an Cr is is 15 Se p -08)
Source: SEBI, Bloomberg, FactSet, MSCI, RBI, Morgan Stanley Research
Key Concern: Global Risks: Crude Oil Prices, Capital Flows, Asset Market Correlations
M O R G A N S T A N L E Y R E S E A R C H
August 2010India Strategy Chartbook
50
Key Concern: Real Rates too Low, Creating Risk of Macro Imbalance
…in High Inflation…
Source: CSO, RBI, Bloomberg, Morgan Stanley Research
…Reflected in Current Account Deficit…Real Interest Rates: Lowest Point in Memory…
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Re al In te r e s t Rate s (91 d ay yie ld - WPI)
-12%
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Trade Def ic it
CAD
CADEXR
6 %
1 1 %
1 6 %
2 1 %
2 6 %
3 1 %
3 6 %
1971
1974
1977
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
2010
Cre d it G ro w th
De p o s it G r o w th
…and Tighter Commercial Bank Liquidity
-4%-2%
0%2%
4%6%
8%10%
12%14%
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010WPI Inflation YoY Grow th Core Inf lation YoY
G
M O R G A N S T A N L E Y R E S E A R C H
August 2010India Strategy Chartbook
51
Key Concern: Second Derivative of Growth Turning Down
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
Mar
-96
Mar
-97
Mar
-98
Mar
-99
Mar
-00
Mar
-01
Mar
-02
Mar
-03
Mar
-04
Mar
-05
Mar
-06
Mar
-07
Mar
-08
Mar
-09
Mar
-10
Mar
-11
Mar
-12
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
70%
Earnings Grow th Le ading Indicator (Re al IIP grow th * (e x food CPI -WPI)-LS
Broad market Earnings Grow th (ex Energy)-RS
EGLI Points to Slower Broad Market Earnings Growth
Earnings Revisions Breadth Taking a Breather India’s Relative Earnings Outperformance
Market Pricing in Growth Slowdown
A n alys t Re v is io n s -L S
-40 %
-30 %
-20 %
-10 %
0 %
10 %
20 %
30 %
40 %
Feb-
01
Aug-
01
Feb-
02
Aug-
02
Feb-
03
Aug-
03
Feb-
04
Aug-
04
Feb-
05
Aug-
05
Feb-
06
Aug-
06
Feb-
07
Aug-
07
Feb-
08
Aug-
08
Feb-
09
Aug-
09
Feb-
10
Aug-
10
MS CI Ind ia ( y oy , Rs )
-6 0 %
-4 0 %
-2 0 %
0 %
2 0 %
4 0 %
6 0 %
8 0 %
1 0 0 %
1 2 0 %
R e fle xivi ty in co rp o ra te e a rn in g s o u tlo o k a n d s h a re p rice
MS Forecasts
-8 0 %
-6 0 %
-4 0 %
-2 0 %
0 %
2 0 %
4 0 %
6 0 %
8 0 %
1 0 0 %
1 2 0 %
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
0 %
5 %
1 0 %
1 5 %
2 0 %
2 5 %
3 0 %
3 M M A No m in a l IIP g r o w th - RS
Y o Y S e n s e x Re tu rn s ( p u s h e d f w d 6 mo n th s )
MS f o re c a s t f o r n o min a l IIP
0
50
100
150
200
250
300
350
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
EuropeEM
A C World
A siaPac ex Japan
IndiaEPS Grow th Rate Inde xe d (M SCI Indice s )
Source: Company data, FactSet, MSCI, Capitaline, Bloomberg, Morgan Stanley Research
M O R G A N S T A N L E Y R E S E A R C H
August 2010India Strategy Chartbook
52
Key Concern: India’s Strong Performance and Valuations
9 89 9
1 0 01 0 11 0 21 0 31 0 41 0 51 0 61 0 71 0 81 0 91 1 0
1-Fe
b-10
9-Fe
b-10
19-F
eb-1
0
2-M
ar-1
0
12-M
ar-1
0
24-M
ar-1
0
6-Ap
r-10
16-A
pr-1
0
27-A
pr-1
0
6-M
ay-1
0
17-M
ay-1
0
26-M
ay-1
0
4-Ju
n-10
15-J
un-1
0
24-J
un-1
0
5-Ju
l-10
14-J
ul-1
0
23-J
ul-1
0
3-Au
g-10
12-A
ug-1
0
23-A
ug-1
0
In d ia 's p e r f o r m a n c e r e la t iv e t o EM s in c e Fe b 2 0 1 0
India’s Outperformance Attracts Attention Relative Valuations Have Gone Past Fair Territory
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
2.0
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
MSCI India PE relative to EM
-60%
-40%
-20%
0%
20%
40%
60%
80%
100%
-4.0% 1.0% 6.0% 11.0%
6 Month Fw d Sensex returns
Non Food & Non Fuel (Y-o-Y) Inf lation
Core Inflation (Currently 8.4%) Needs to Be in Double Digits to Decisively Hurt Equities over the Coming Six MonthsPE Responses to Inflexion Points in Rates
10
12
14
16
18
20
22
24
26
28
30
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
3
4
5
6
7
8
9
10
11
12
13
MSCI India Trailing PE (LS)
91-day yie ld % - RS
Source: FactSet, MSCI, Morgan Stanley Research
M O R G A N S T A N L E Y R E S E A R C H
August 2010India Strategy Chartbook
53
Mid-caps vs. Large Caps: Mid-Caps Continue to Look AttractiveBroad Market: Earnings Will Likely Grow Faster
BSE Sens ex Cons tituents
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
70%
Oct
-99
Apr-
00
Oct
-00
Apr-
01
Oct
-01
Apr-
02
Oct
-02
Apr-
03
Oct
-03
Apr-
04
Oct
-04
Apr-
05
Oct
-05
Apr-
06
Oct
-06
Apr-
07
Oct
-07
Apr-
08
Oct
-08
Apr-
09
Oct
-09
Apr-
10
Br o ad M ar k e t (e x En e r g y)
Ne t Pr o f it Gr o w th
M S co ve r ag e (e x-e n e r g y)
0 .4
0 .5
0 .6
0 .7
0 .8
0 .9
1 .0
1 .1
1 .2
1 .3
1 .4
Jul-0
5
Oct
-05
Jan-
06
Apr-
06
Jul-0
6
Oct
-06
Jan-
07
Apr-
07
Jul-0
7
Oct
-07
Jan-
08
Apr-
08
Jul-0
8
Oct
-08
Jan-
09
Apr-
09
Jul-0
9
Oct
-09
Jan-
10
Apr-
10
Jul-1
0
BS E M id c a p P E Re la t iv e t o BS E
B S E S ma llc a p PE Re la tiv e to B S E S e n s e x PE
Broad Market: Do Not Rule Out Premium Valuations Broad Market Has Lost Share in Trading Volumes
- 7 5 %
- 5 0 %
- 2 5 %
0 %
2 5 %
5 0 %
7 5 %
1 0 0 %
1 2 5 %
1 5 0 %
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Br o a d M a r k e t Y o Y m e d ia n r e t u r n s
B S E S e n s e x Y o Y r e tu r n s
Broad Market Returns: Likely to Beat Sensex
1 5 %
2 5 %
3 5 %
4 5 %
5 5 %
6 5 %
7 5 %
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
B S E S e n s e x C o n s t it u e n t s
S h a r e o f M a r k e t C a p
S h a r e o f T r a d e d V o lu m e s
Source: Bloomberg, Capitaline, company data, Morgan Stanley Research
M O R G A N S T A N L E Y R E S E A R C H
August 2010India Strategy Chartbook
54
Equities vs. Long Bonds: We Prefer Equities for the Growth Optionality
E = Morgan Stanley Research estimates Source: RBI, AMFI, Bloomberg, Morgan Stanley Research
Bond Supply Receding Relative to Equities
Yield Curve Flattening Likely to Be Led by HigherShort Rates Indian Long Bonds vs. UST: At Multi-Year Highs
Fixed Income Funds Under-owned vs. Equities
-1.0-0.50.00.51.01.52.02.53.03.54.04.5
2002
2003
2004
2005
2006
2007
2008
2009
Yie ld cu r ve - 10-ye ar an d 91-d ay s p r e ad
-
1
2
3
4
5
6
7
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Ratio o f A UM : Fixe d In co m e to Eq u it ie s
E q u itie s U n d e r-o w n e d
E q u itie s O ve r-o w n e d0
0 .2
0 .4
0 .6
0 .8
1
1 .2
1 .4
F199
4
F199
5
F199
6
F199
7
F199
8
F199
9
F200
0
F200
1
F200
2
F200
3
F200
4
F200
5
F200
6
F200
7
F200
8
F200
9
F201
0E
F201
1E
F201
2E
Eq u ity Su p p ly /C e n tr a l f is ca l d e f ic it
Bonds ov e rs upp lied
Equ ities ov e rs upp lied
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
10-ye ar T r e as u r y Yie ld s : In d ia vs . th e US
Long term av erage
M O R G A N S T A N L E Y R E S E A R C H
August 2010India Strategy Chartbook
55
12
34
56
7
89
10
1 1
3
7
6
4
9
5
10
8
Tele
com
Mat
eria
ls
Ener
gy
Hea
lthca
re
Tech
nolo
gy
Indu
stria
ls
Utili
ties
Con
sum
erSt
aple
s
Fina
ncia
ls
Con
sum
erD
isc
Current Ranking
Pr ior Ranking
Sector Rotation Model: Healthcare, Utilities Rankings Rise, Staples, Industrials Fall
0%
500%
1000%
1500%
2000%
2500%
3000%
3500%
Feb-
07
May
-07
Aug-
07
Nov
-07
Feb-
08
May
-08
Aug-
08
Nov
-08
Feb-
09
May
-09
Aug-
09
Nov
-09
Feb-
10
May
-10
Aug-
10C u m u lat ive u n w e ig h te d e xce s s r e tu r n o f to p th r e e r an k e d s e cto r s o ve r b o t to m th r e e r an k e d s e cto r s
- 7 5 %
-2 5 %
2 5 %
7 5 %
1 2 5 %
1 7 5 %
2 2 5 %
2 7 5 %
3 2 5 %
3 7 5 %
Feb-
07
May
-07
Aug-
07
Nov
-07
Feb-
08
May
-08
Aug-
08
Nov
-08
Feb-
09
May
-09
Aug-
09
Nov
-09
Feb-
10
May
-10
Aug-
10
M o n th ly u n w e ig h te d e x c e s s r e tu r n o f to p t h r e e r a n k e d s e c to r s o v e r b o t to m t h r e e r a n k e d s e c t o r s
Cumulative Returns from Our Sector Rotation Model MoM Returns from Our Sector Rotation Model
1
2
3
4
5
6
7
8
9
10
Jan-
03
Jul-0
3
Jan-
04
Jul-0
4
Jan-
05
Jul-0
5
Jan-
06
Jul-0
6
Jan-
07
Jul-0
7
Jan-
08
Jul-0
8
Jan-
09
Jul-0
9
Jan-
10
Jul-1
0
M-o-M Sector Rotation 3 MMA M-o-M Sector Rotation
Actual Sector Rotation: Flat MoMSummary of Changes to Sector Rankings
Lower the ranking better the score in the model
Source: FactSet, MSCI, Morgan Stanley Research
M O R G A N S T A N L E Y R E S E A R C H
August 2010India Strategy Chartbook
56
Sector Performance Snapshot
MSCI India Relative to MSCI EM
1M 2M 3M 6M 12M YTD 1M 2M 3M 6M 12M YTDMSCI EM 2% -1% 2% 5% 9% 5%CD -2% -7% -3% 4% 14% 6% 6 7 7 6 3 3CS 4% 0% 4% 6% -6% 5% 2 3 4 4 8 5Energy -2% -5% -5% 7% 4% 6% 8 6 9 2 7 4Financials 7% 6% 8% 11% 13% 15% 1 1 2 1 4 2Healthcare -2% -7% 0% 6% 24% 0% 7 8 5 3 2 6Industrials 0% -3% -3% 3% 6% -1% 5 5 8 7 5 7Technology 3% 3% 8% 4% 25% 16% 3 2 3 5 1 1Materials 1% -1% -1% -6% 5% -7% 4 4 6 10 6 9Telecoms -12% -17% 8% 0% -33% -4% 10 10 1 8 10 8Utilities -4% -9% -9% -3% -8% -9% 9 9 10 9 9 10
Relative Performance Rank
1M 2M 3M 6M 12M YTD 1M 2M 3M 6M 12M YTDMSCI APXJ 0% -1% 1% 3% 9% 3%CD -4% -6% -4% 1% 11% 1% 8 8 8 6 3 4CS 2% -2% 1% 5% -5% 5% 3 3 4 2 8 3Energy -4% -4% -4% 1% -3% -2% 7 6 7 7 7 6Financials 6% 7% 9% 12% 18% 16% 1 1 1 1 2 1Healthcare -3% -4% -3% 3% 8% 0% 6 5 6 4 4 5Industrials -1% -3% -3% 3% 7% -2% 4 4 5 5 5 7Technology 3% 2% 7% 5% 24% 16% 2 2 2 3 1 2Materials -3% -5% -6% -8% 6% -8% 5 7 9 9 6 8Telecoms -14% -18% 7% -2% -34% -9% 10 10 3 8 10 9Utilities -10% -17% -16% -10% -10% -17% 9 9 10 10 9 10
Relative Performance Rank
1M 2M 3M 6M 12M YTD 1M 2M 3M 6M 12M YTDMSCI ACWI 4% 1% 10% 13% 22% 11%CD 2% -4% 11% 15% 31% 11% 6 6 5 4 4 5CS 7% 0% 15% 19% 14% 15% 3 5 3 2 7 4Energy -1% -6% 3% 13% 11% 9% 8 8 9 5 8 6Financials 9% 11% 19% 25% 40% 25% 1 1 1 1 2 1Healthcare 0% -6% 4% 18% 47% 15% 7 7 7 3 1 3Industrials 6% 5% 14% 13% 14% 5% 4 3 4 6 6 7Technology 7% 6% 16% 11% 36% 18% 2 2 2 7 3 2Materials 2% 0% 3% -2% 17% -2% 5 4 8 10 5 9Telecoms -14% -20% 7% 0% -32% 1% 10 10 6 9 10 8Utilities -5% -12% -6% 2% 4% -3% 9 9 10 8 9 10
Relative Performance Rank
MSCI India Relative to MSCI APXJ
MSCI India Relative to MSCI ACWI
Past performance is no guarantee of future results. Results shown do not include transaction costs. Source: FactSet, MSCI, Morgan Stanley Research
MSCI India
1M 2M 3M 6M 12M YTD 1M 2M 3M 6M 12M YTDMSCI India 0% 2% 12% 10% 17% 3%CD -2% -2% 12% 18% 37% 11% 6 6 5 3 2 3CS 4% 4% 21% 19% 21% 14% 2 3 1 2 5 1Energy -6% -5% 3% 5% 0% -6% 9 8 9 7 8 8Financials 4% 11% 21% 22% 24% 14% 1 1 2 1 4 2Healthcare -1% -5% 5% 9% 39% 5% 5 7 8 5 1 5Industrials 0% 5% 15% 12% 15% 4% 3 2 4 4 7 6Technology 0% 3% 12% 6% 34% 7% 4 4 6 6 3 4Materials -2% 1% 9% -3% 18% -11% 7 5 7 10 6 10Telecoms -13% -15% 18% 5% -35% -2% 10 10 3 8 10 7Utilities -5% -8% 0% 1% -4% -11% 8 9 10 9 9 9
Absolute Performance Rank
M O R G A N S T A N L E Y R E S E A R C H
August 2010India Strategy Chartbook
57
Consumer Disc.
YoY Absolute Returns
-80%
-40%
0%
40%
80%
120%
160%
200%
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
-30%
-10%
10%
30%
50%
70%
90%
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
-90%
-50%
-10%
30%
70%
110%
150%20
01
2002
2003
2004
2005
2006
2007
2008
2009
2010
-80%
-50%
-20%
10%
40%
70%
100%
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
-60%
-20%
20%
60%
100%
140%
180%
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
-60%
-40%
-20%
0%
20%
40%
60%
80%
100%
120%
140%
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
-40%
-20%
0%
20%
40%
60%
80%
100%
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
-80%
-60%
-40%
-20%
0%
20%
40%
60%
80%
100%
120%
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Materials
HealthcareFinancialsEnergyConsumer Staples
Industrials Technology UtilitiesTelecoms
-60%
-30%
0%
30%
60%
90%
120%
150%
180%
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
-80%
-30%
20%
70%
120%
170%
220%
270%
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Source: FactSet, MSCI, Morgan Stanley Research
M O R G A N S T A N L E Y R E S E A R C H
August 2010India Strategy Chartbook
58
-15%
-10%
-5%
0%
5%
10%
15%
20%
Aug-
09
Oct
-09
Dec
-09
Feb-
10
Apr-
10
Jun-
10
Aug-
10
Consumer Disc.
1M Absolute Returns
Materials
HealthcareFinancialsEnergyConsumer Staples
Industrials Technology UtilitiesTelecoms
-10%
-5%
0%
5%
10%
15%
20%
25%
Aug-
09
Oct
-09
Dec
-09
Feb-
10
Apr-
10
Jun-
10
Aug-
10
-10%
-5%
0%
5%
10%
15%
20%
Aug-
09
Oct
-09
Dec
-09
Feb-
10
Apr-
10
Jun-
10
Aug-
10
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
Aug-
09
Oct
-09
Dec
-09
Feb-
10
Apr-
10
Jun-
10
Aug-
10
-11%
-7%
-3%
1%
5%
9%
13%
17%
Aug-
09
Oct
-09
Dec
-09
Feb-
10
Apr-
10
Jun-
10
Aug-
10
-16%
-12%
-8%
-4%
0%
4%
8%
12%
16%
Aug-
09
Oct
-09
Dec
-09
Feb-
10
Apr-
10
Jun-
10
Aug-
10
-10%
-5%
0%
5%
10%
15%
20%
25%Au
g-09
Oct
-09
Dec
-09
Feb-
10
Apr-
10
Jun-
10
Aug-
10
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
Aug-
09
Oct
-09
Dec
-09
Feb-
10
Apr-
10
Jun-
10
Aug-
10
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
Aug-
09
Oct
-09
Dec
-09
Feb-
10
Apr-
10
Jun-
10
Aug-
10
-12%
-8%
-4%
0%
4%
8%
12%
Aug-
09
Oct
-09
Dec
-09
Feb-
10
Apr-
10
Jun-
10
Aug-
10
Source: FactSet, MSCI, Morgan Stanley Research
M O R G A N S T A N L E Y R E S E A R C H
August 2010India Strategy Chartbook
59
Consumer Disc.
YoY Performance Relative to EM
-50%
-25%
0%
25%
50%
75%
100%
1995
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2010
-50%
-30%
-10%
10%
30%
50%
70%
1995
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2010
-60%
-40%
-20%
0%
20%
40%
60%
80%
1995
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2010
-50%
-25%
0%
25%
50%
75%
100%
1995
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2010
-50%
-25%
0%
25%
50%
75%
100%
1995
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2010
Materials
HealthcareFinancialsEnergyConsumer Staples
Industrials Technology UtilitiesTelecoms
-60%
-40%
-20%
0%
20%
40%
60%
80%
1995
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2010
-60%
-40%
-20%
0%
20%
40%
60%
80%
1995
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2010
-70%
-45%
-20%
5%
30%
55%
80%
105%
130%
155%
180%19
9519
9719
9819
9920
0020
0120
0220
0320
0420
0520
0620
0720
0820
10
-60%
-40%
-20%
0%
20%
40%
60%
80%
100%
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2008
2009
2010
-40%
-20%
0%
20%
40%
60%
80%
100%
120%
140%
1995
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2010
Source: FactSet, MSCI, Morgan Stanley Research
M O R G A N S T A N L E Y R E S E A R C H
August 2010India Strategy Chartbook
60
Consumer Disc.
Deviation from 200 DMA of Respective Sector Index
-40%
-20%
0%
20%
40%
60%
80%
1995
1997
1999
2001
2003
2005
2006
2008
2010
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
1995
1997
1999
2001
2003
2005
2006
2008
2010
-70%
-50%
-30%
-10%
10%
30%
50%
70%19
95
1997
1999
2001
2003
2005
2006
2008
2010
-60%
-35%
-10%
15%
40%
65%
90%
1997
1999
2001
2003
2005
2007
2009
-40%
-15%
10%
35%
60%
85%
110%
1995
1997
1999
2001
2003
2005
2006
2008
2010
-40%
-20%
0%
20%
40%
60%
80%
1995
1997
1999
2001
2003
2005
2006
2008
2010
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
1995
1997
1999
2001
2003
2005
2006
2008
2010
-40%
-20%
0%
20%
40%
60%
1995
1997
1999
2001
2003
2005
2006
2008
2010
Materials
HealthcareFinancialsEnergyConsumer Staples
Industrials Technology UtilitiesTelecoms
-40%
-20%
0%
20%
40%
60%
80%
1995
1997
1999
2001
2003
2005
2006
2008
2010
-70%
-45%
-20%
5%
30%
55%
80%
1995
1997
1999
2001
2003
2005
2006
2008
2010
Source: FactSet, MSCI, Morgan Stanley Research
M O R G A N S T A N L E Y R E S E A R C H
August 2010India Strategy Chartbook
61
Consumer Disc.
Relative Performance Since Jan-08
-20%
0%
20%
40%
60%
80%
100%
Jan-
08
Apr-
08
Jul-0
8
Oct
-08
Jan-
09
Apr-
09
Jul-0
9
Oct
-09
Jan-
10
Apr-
10
Jul-1
0
-30%
-25%
-20%
-15%
-10%
-5%
0%
5%
Jan-
08
Apr-
08
Jul-0
8
Oct
-08
Jan-
09
Apr-
09
Jul-0
9
Oct
-09
Jan-
10
Apr-
10
Jul-1
0
-10%
10%
30%
50%
70%
90%
110%
Jan-
08
Apr-
08
Jul-0
8
Oct
-08
Jan-
09
Apr-
09
Jul-0
9
Oct
-09
Jan-
10
Apr-
10
Jul-1
0
-15%
-5%
5%
15%
25%
35%
45%
55%
65%
Jan-
08
Apr-
08
Jul-0
8
Oct
-08
Jan-
09
Apr-
09
Jul-0
9
Oct
-09
Jan-
10
Apr-
10
Jul-1
0
-80%
-70%
-60%
-50%
-40%
-30%
-20%
-10%
0%
10%
Jan-
08
Apr-
08
Jul-0
8
Oct
-08
Jan-
09
Apr-
09
Jul-0
9
Oct
-09
Jan-
10
Apr-
10
Jul-1
0 -25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
Jan-
08
Apr-
08
Jul-0
8
Oct
-08
Jan-
09
Apr-
09
Jul-0
9
Oct
-09
Jan-
10
Apr-
10
Jul-1
0
-50%
-40%
-30%
-20%
-10%
0%
10%
Jan-
08
Apr-
08Ju
l-08
Oct
-08
Jan-
09Ap
r-09
Jul-0
9O
ct-0
9
Jan-
10Ap
r-10
Jul-1
0
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
Jan-
08
Apr-
08
Jul-0
8
Oct
-08
Jan-
09Ap
r-09
Jul-0
9
Oct
-09
Jan-
10
Apr-
10
Jul-1
0
-20%
0%
20%
40%
60%
80%
100%
Jan-
08
Apr-
08Ju
l-08
Oct
-08
Jan-
09Ap
r-09
Jul-0
9
Oct
-09
Jan-
10Ap
r-10
Jul-1
0
-30%
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
Jan-
08
Apr-
08Ju
l-08
Oct
-08
Jan-
09
Apr-
09Ju
l-09
Oct
-09
Jan-
10Ap
r-10
Jul-1
0
Materials
HealthcareFinancialsEnergyConsumer Staples
Industrials Technology UtilitiesTelecoms
Source: FactSet, MSCI, Morgan Stanley Research
M O R G A N S T A N L E Y R E S E A R C H
August 2010India Strategy Chartbook
62
Consumer Disc.
Relative P/E to MSCI India
0
10
20
30
40
50
60
1995
1996
1997
1998
2000
2001
2002
2003
2005
2006
2007
2008
2010
0.5
0.7
0.9
1.1
1.3
1.5
1.7
1.9
0
10
20
30
40
50
60
1995
1996
1997
1998
2000
2001
2002
2003
2005
2006
2007
2008
2010
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
0
5
10
15
20
25
30
1995
1996
1997
1998
2000
2001
2002
2003
2005
2006
2007
2008
2010
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
10
20
30
40
50
60
70
1995
1996
1997
1998
2000
2001
2002
2003
2005
2006
2007
2008
2010
0.5
1.0
1.5
2.0
2.5
3.0
3.5
0
5
10
15
20
25
30
35
40
45
50
1995
1996
1997
1998
2000
2001
2002
2003
2005
2006
2007
2008
2010
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
Materials
HealthcareFinancialsEnergyConsumer Staples
Industrials Technology UtilitiesTelecoms
Dark blue Line – Price to Earnings – LS, Light red line – Sector P/E Relative to MSCI India – RS, Pink Line - Long Term Average of Relative P/E- RS
0
5
10
15
20
25
30
35
40
45
1995
1996
1997
1998
2000
2001
2002
2003
2005
2006
2007
2008
2010
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3
5
7
9
11
13
15
17
19
21
23
1995
1996
1997
1998
2000
2001
2002
2003
2005
2006
2007
2008
2010
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
-30
-10
10
30
50
70
90
110
130
15019
9519
9619
9719
9820
0020
0120
0220
0320
0520
0620
0720
0820
10
-2
-1
0
1
2
3
4
5
0
5
10
15
20
25
30
35
40
45
50
1996
1997
1999
2000
2001
2003
2004
2006
2007
2008
2010
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
0
5
10
15
20
25
30
35
40
1995
1996
1997
1998
2000
2001
2002
2003
2005
2006
2007
2008
2010
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
Source: FactSet, MSCI, Morgan Stanley Research
M O R G A N S T A N L E Y R E S E A R C H
August 2010India Strategy Chartbook
63
Consumer Disc.
Relative P/E to Respective EM Sector
Materials
HealthcareFinancialsEnergyConsumer Staples
Industrials Technology UtilitiesTelecoms
-
0.5
1.0
1.5
2.0
2.5
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
1.0
1.2
1.4
1.6
1.8
2.0
2.2
2.4
2.6
2.8
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
-
0.5
1.0
1.5
2.0
2.5
3.0
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
-
0.5
1.0
1.5
2.0
2.5
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
-
0.5
1.0
1.5
2.0
2.5
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
-
0.5
1.0
1.5
2.0
2.5
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
0.3
0.5
0.7
0.9
1.1
1.3
1.5
1.7
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
(1)
-
1
2
3
4
5
6
7
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
-
0.5
1.0
1.5
2.0
2.5
3.0
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
-
0.4
0.8
1.2
1.6
2.0
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Source: FactSet, MSCI, Morgan Stanley Research
M O R G A N S T A N L E Y R E S E A R C H
August 2010India Strategy Chartbook
64
Consumer Disc.
Relative P/B to MSCI India
0
2
4
6
8
10
12
14
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
2.0
-3
2
7
12
17
22
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
1.5
2.5
3.5
4.5
5.5
6.5
7.5
8.5
9.5
0
10
20
30
40
50
60
70
80
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
0
2
4
6
8
10
12
14
16
18
20
0
1
2
3
4
5
6
7
8
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
0
1
2
3
4
5
6
7
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
0.0
0.2
0.4
0.6
0.8
1.0
0
1
2
3
4
5
6
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
0
1
2
3
4
5
6
7
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
0.2
0.4
0.6
0.8
1.0
1.2
1.4
2
4
6
8
10
12
14
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
0
1
2
3
4
5
6
7
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
0.2
0.4
0.6
0.8
1.0
1.2
1.4
Materials
HealthcareFinancialsEnergyConsumer Staples
Industrials Technology UtilitiesTelecoms
Dark blue Line – Price to Book – LS, Light red line – Sector P/B Relative to MSCI India – RS, Pink Line - Long Term Average of Relative P/B - RS
0
1
2
3
4
5
6
7
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
0.3
0.5
0.7
0.9
1.1
1.3
1.5
1.7
1.9
2.1
Source: FactSet, MSCI, Morgan Stanley Research
M O R G A N S T A N L E Y R E S E A R C H
August 2010India Strategy Chartbook
65
Consumer Disc.
Relative P/B to Respective EM Sector
Materials
HealthcareFinancialsEnergyConsumer Staples
Industrials Technology UtilitiesTelecoms
0.5
0.7
0.9
1.1
1.3
1.5
1.7
1.9
2.1
2.3
2.5
2.7
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2
3
4
5
6
7
8
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
0.4
0.9
1.4
1.9
2.4
2.9
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
0.4
0.9
1.4
1.9
2.4
2.9
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
0.9
1.4
1.9
2.4
2.9
3.4
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
0.6
1.1
1.6
2.1
2.6
3.1
3.6
4.1
4.6
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
-
2
4
6
8
10
12
14
16
18
2019
9519
9619
9719
9819
9920
0020
0120
0220
0320
0420
0520
0620
0720
0820
0920
10
0.6
0.8
1.0
1.2
1.4
1.6
1.8
2.0
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
-
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
0.4
0.9
1.4
1.9
2.4
2.9
3.4
3.9
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Source: FactSet, MSCI, Morgan Stanley Research
M O R G A N S T A N L E Y R E S E A R C H
August 2010India Strategy Chartbook
66
Consumer Disc.
Earnings Revision Breadth 3MMA
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
-30%
-20%
-10%
0%
10%
20%
30%
40%
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
-60%
-50%
-40%
-30%
-20%
-10%
0%10%
20%
30%
40%
50%
60%
70%20
01
2002
2003
2004
2005
2006
2007
2008
2009
2010
-60%
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
70%
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
-40%
-30%
-20%
-10%
0%
10%
20%
30%
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Materials
HealthcareFinancialsEnergyConsumer Staples
Industrials Technology UtilitiesTelecoms
-40%
-20%
0%
20%
40%
60%
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Source: FactSet, MSCI, Morgan Stanley Research. Earnings revision breadth is calculated as ratio of net upward revisions to the total number of revisions by the brokers on the stocks.
M O R G A N S T A N L E Y R E S E A R C H
August 2010India Strategy Chartbook
67
Consumer Disc.
Consensus Earnings Growth
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Oct
-08
Jan-
09
Mar
-09
May
-09
Jul-0
9
Oct
-09
Dec
-09
Feb-
10
May
-10
Jul-1
0
F2011E
F2012E
11%
13%
15%
17%
19%
21%
23%
25%
Sep-
08
Dec
-08
Feb-
09
Apr-
09
Jul-0
9
Sep-
09
Nov
-09
Jan-
10
Apr-
10
Jun-
10
Aug-
10
F2011E
F2012E
0%
5%
10%
15%
20%
25%O
ct-0
8
Jan-
09
Mar
-09
May
-09
Jul-0
9
Oct
-09
Dec
-09
Feb-
10
May
-10
Jul-1
0
F2011E
F2012E
-45%
-35%
-25%
-15%
-5%
5%
15%
25%
Nov
-08
Jan-
09Fe
b-09
Apr-
09Ju
n-09
Aug-
09O
ct-0
9D
ec-0
9Ja
n-10
Mar
-10
May
-10
Jul-1
0
F2012E
F2011E
6%
7%
8%
9%
10%
11%
12%
13%
14%
15%
16%
Nov
-08
Dec
-08
Feb-
09Ap
r-09
May
-09
Jul-0
9Au
g-09
Oct
-09
Dec
-09
Jan-
10M
ar-1
0Ap
r-10
Jun-
10Au
g-10
F2011E
F2012E
10%
15%
20%
25%
30%
35%
40%
Sep-
08
Dec
-08
Feb-
09
Apr-
09
Jul-0
9Se
p-09
Nov
-09
Jan-
10
Apr-
10Ju
n-10
Aug-
10
F2012E
F2011E
10%
14%
18%
22%
26%
30%
34%
38%
42%
Oct
-08
Jan-
09
Mar
-09
May
-09
Jul-0
9
Oct
-09
Dec
-09
Feb-
10
May
-10
Jul-1
0
F2011E
F2012E
10%
15%
20%
25%
30%
35%
Oct
-08
Jan-
09
Mar
-09
May
-09
Jul-0
9
Oct
-09
Dec
-09
Feb-
10
May
-10
Jul-1
0
F2012E
F2011E
Materials
HealthcareFinancialsEnergyConsumer Staples
Industrials Technology UtilitiesTelecoms
-5%
0%
5%
10%
15%
20%
25%
Sep-
08
Dec
-08
Feb-
09
Apr-
09
Jul-0
9
Sep-
09
Nov
-09
Jan-
10
Apr-
10
Jun-
10
Aug-
10
F2011E
F2012E
-5%
5%
15%
25%
35%
45%
55%
65%
75%
Nov
-08
Jan-
09Fe
b-09
Apr-
09Ju
n-09
Aug-
09O
ct-0
9D
ec-0
9Ja
n-10
Mar
-10
May
-10
Jul-1
0
F2011E
F2012E
Source: FactSet, MSCI, Morgan Stanley Research
M O R G A N S T A N L E Y R E S E A R C H
August 2010India Strategy Chartbook
68
Earnings Growth Revisions
F11 Current 1W 1M 3M 6M 12M 1W 1M 3M 6M 12M
CD 14% 14% 13% 17% 12% 15% 0.0% 0.6% -2.7% 1.9% -0.7%
CS 11% 11% 12% 14% 16% 16% 0.0% -0.8% -2.4% -4.3% -4.1%
Energy 31% 31% 34% 32% 26% 19% -0.4% -3.3% -1.4% 4.5% 11.3%
Financials 35% 35% 35% 37% 24% 21% -0.1% 0.0% -2.1% 11.2% 14.8%
Healthcare 25% 25% 26% 41% 30% 21% 0.2% -1.0% -15.3% -4.3% 4.5%
Industrials 99% 97% 88% 74% 60% 36% 2.0% 10.3% 25.0% 38.8% 62.3%
IT 23% 23% 23% 20% 18% 15% 0.0% 0.1% 2.6% 5.3% 7.9%
Materials 65% 65% 68% 70% 51% 29% 0.2% -2.7% -4.3% 14.1% 36.0%
Telecoms -41% -39% -28% -25% -18% 9% -1.4% -12.4% -15.6% -23.0% -49.4%
Utilities 9% 9% 11% 12% 12% 9% -0.3% -2.3% -3.5% -3.2% 0.2%
EPS Earnings Growth (MSCI India constituents) Earnings Revision
F12 Current 1W 1M 3M 6M 12M 1W 1M 3M 6M 12M
CD 14% 14% 14% 13% 16% NA 0.0% 0.3% 1.3% -1.8% NA
CS 15% 15% 15% 15% 15% NA 0.1% 0.3% 0.4% 0.4% NA
Energy 21% 20% 19% 18% 16% NA 0.3% 2.1% 3.0% 4.2% NA
Financials 27% 27% 21% 21% 30% NA 0.0% 5.8% 5.6% -3.0% NA
Healthcare 25% 25% 27% 25% 21% NA -0.4% -2.0% -0.1% 4.2% NA
Industrials 34% 33% 34% 33% 35% NA 1.2% 0.9% 1.7% -0.9% NA
IT 10% 10% 9% 10% 7% NA 0.0% 0.3% 0.0% 2.8% NA
Materials 22% 22% 21% 21% 19% NA 0.1% 0.4% 0.7% 2.6% NA
Telecoms 16% 16% 16% 18% 20% NA 0.6% 0.5% -2.0% -4.1% NA
Utilities 15% 15% 15% 14% 14% NA 0.2% -0.2% 0.6% 1.4% NA
EPS Earnings Growth (MSCI India constituents) Earnings Revision
Source: FactSet, MSCI, Morgan Stanley Research
M O R G A N S T A N L E Y R E S E A R C H
August 2010India Strategy Chartbook
69
Consumer Disc.
Quarterly Earnings Growth
(100)
(50)
-
50
100
150
200
Jun-
03M
ar-0
4D
ec-0
4
Sep-
05Ju
n-06
Mar
-07
Dec
-07
Sep-
08Ju
n-09
Mar
-10
(400)
(300)
(200)
(100)
0
100
200
300
400
500
600bps%
(100)
100
300
500
700
900
Jun-
03M
ar-0
4
Dec
-04
Sep-
05Ju
n-06
Mar
-07
Dec
-07
Sep-
08Ju
n-09
Mar
-10
(400)(300)(200)(100)0100200300400500600700bps%
-
10
20
30
40
50
60
70
Jun-
03
Mar
-04
Dec
-04
Sep-
05
Jun-
06
Mar
-07
Dec
-07
Sep-
08
Jun-
09
Mar
-10
(700)
(600)
(500)
(400)
(300)
(200)(100)
0
100
200
300
400bps%
(100)
(50)
-
50
100
150
Jun-
03M
ar-0
4D
ec-0
4
Sep-
05Ju
n-06
Mar
-07
Dec
-07
Sep-
08Ju
n-09
Mar
-10
(2,000)
(1,500)
(1,000)
(500)
0
500
1,000bps%
(30)
(20)
(10)
-
10
20
30
40
50
60
Jun-
03M
ar-0
4D
ec-0
4Se
p-05
Jun-
06
Mar
-07
Dec
-07
Sep-
08Ju
n-09
Mar
-10
(600)
(400)
(200)
0
200
400
600
800% bps
(10)
(5)-
5
1015
2025
30
3540
45
Jun-
03
Mar
-04
Dec
-04
Sep-
05
Jun-
06
Mar
-07
Dec
-07
Sep-
08Ju
n-09
Mar
-10
(300)
(200)
(100)
0
100
200
300
400
500bps%
(400)
(300)
(200)
(100)
-
100
200
300
Jun-
03M
ar-0
4D
ec-0
4Se
p-05
Jun-
06M
ar-0
7D
ec-0
7Se
p-08
Jun-
09M
ar-1
0
(1,500)
(1,000)
(500)
0
500
1,000
1,500% bps
(40)
(20)
-
20
40
60
80
100
Jun-
03M
ar-0
4D
ec-0
4Se
p-05
Jun-
06M
ar-0
7D
ec-0
7Se
p-08
Jun-
09M
ar-1
0
(1,000)
(500)
0
500
1,000
1,500bps
(20)
(10)
-
10
20
30
40
50
60
Jun-
03M
ar-0
4D
ec-0
4Se
p-05
Jun-
06M
ar-0
7D
ec-0
7Se
p-08
Jun-
09M
ar-1
0
(1,000)
(800)
(600)
(400)
(200)
0
200
400
600
800bps%
Materials
HealthcareFinancialsEnergyConsumer Staples
Industrials Technology UtilitiesTelecoms
Green dotted Line – YoY Net profit growth (%) – LS, Red line (light) - YoY Revenue growth (%) – LS, Blue Line (dark) – Operating margin trend (bp)- RS
(100)
(50)
-
50
100
150
200
250
300
350
400
Jun-
03M
ar-0
4D
ec-0
4Se
p-05
Jun-
06M
ar-0
7D
ec-0
7Se
p-08
Jun-
09M
ar-1
0
(1,500)
(1,000)
(500)
0
500
1,000
1,500bps%
Source: FactSet, MSCI, Morgan Stanley Research
M O R G A N S T A N L E Y R E S E A R C H
August 2010India Strategy Chartbook
70
Consumer Disc.
Annual Earnings Growth
-40%
-20%
0%
20%
40%
60%
80%
100%
1998
1999
2000
2001
2001
2002
2003
2004
2004
2005
2006
2007
2007
2008
2009
2010
-15%
-5%
5%
15%
25%
35%
45%
1998
1999
2000
2001
2001
2002
2003
2004
2004
2005
2006
2007
2007
2008
2009
2010
-40%
-20%
0%
20%
40%
60%
80%
100%20
01
2002
2003
2004
2004
2005
2006
2007
2007
2008
2009
2010
- 70%
-50%
-30%
-10%
10%
30%
50%
70%
1998
1999
2000
2001
2001
2002
2003
2004
2004
2005
2006
2007
2007
2008
2009
2010
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
1998
1999
2000
2001
2001
2002
2003
2004
2004
2005
2006
2007
2007
2008
2009
2010
-40%
-20%
0%
20%
40%
60%
80%
100%
1998
1999
2000
2001
2001
2002
2003
2004
2004
2005
2006
2007
2007
2008
2009
2010
-40%
-20%
0%
20%
40%
60%
1998
1999
2000
2001
2001
2002
2003
2004
2004
2005
2006
2007
2007
2008
2009
2010
-60%
-40%
-20%
0%
20%
40%
60%
80%
100%
120%
140%
160%
180%
200%
1998
1999
2000
2001
2001
2002
2003
2004
2004
2005
2006
2007
2007
2008
2009
2010
-40%
-20%
0%
20%
40%
60%
80%
2001
2001
2002
2003
2004
2004
2005
2006
2007
2007
2008
2009
2010
Materials
HealthcareFinancialsEnergyConsumer Staples
Industrials Technology UtilitiesTelecoms
-100%
-50%
0%
50%
100%
150%
200%
1998
1999
2000
2001
2001
2002
2003
2004
2004
2005
2006
2007
2007
2008
2009
2010
Dark Blue Line – 3-year CAGR in EPS, Light Red line – Annual EPS Growth
Source: FactSet, MSCI, Morgan Stanley Research
M O R G A N S T A N L E Y R E S E A R C H
August 2010India Strategy Chartbook
71
ROE Trends
10%
15%
20%
25%
30%
35%
40%
2000
2001
2001
2002
2003
2004
2004
2005
2006
2007
2007
2008
2009
2010
5%
10%
15%
20%
25%
30%
2000
2001
2001
2002
2003
2004
2004
2005
2006
2007
2007
2008
2009
2010
0%
5%
10%
15%
20%
25%
30%
35%
40%
2000
2001
2001
2002
2003
2004
2004
2005
2006
2007
2007
2008
2009
2010
10%
15%
20%
25%
30%
35%20
0020
0120
0120
0220
0320
0420
0420
0520
0620
0720
0720
0820
0920
10
5%
10%
15%
20%
25%
30%
35%
2000
2001
2001
2002
2003
2004
2004
2005
2006
2007
2007
2008
2009
2010
10%
12%
14%
16%
18%
20%
22%
24%
2000
2001
2001
2002
2003
2004
2004
2005
2006
2007
2007
2008
2009
2010
24%
26%
28%
30%
32%
34%
36%
38%
40%
42%
44%
2000
2001
2001
2002
2003
2004
2004
2005
2006
2007
2007
2008
2009
2010
10%
12%
14%
16%
18%
20%
22%
24%
26%
28%
2000
2001
2001
2002
2003
2004
2004
2005
2006
2007
2007
2008
2009
2010
8%
12%
16%
20%
24%
28%
32%
36%
2000
2001
2001
2002
2003
2004
2004
2005
2006
2007
2007
2008
2009
2010
8%
10%
12%
14%
16%
18%
20%
22%
24%
2000
2001
2001
2002
2003
2004
2004
2005
2006
2007
2007
2008
2009
2010
Technology
HealthcareFinancialsEnergyConsumer Staples
Industrials Materials UtilitiesTelecoms
Dark blue Line – Sector ROE, Light red line – five-year moving avg. ROE
Consumer Disc.
Source: FactSet, MSCI, Morgan Stanley Research
M O R G A N S T A N L E Y R E S E A R C H
August 2010India Strategy Chartbook
72
Consumer Disc.
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
-
100
200
300
400
500
600
700
800
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
(1,800)
(1,600)
(1,400)
(1,200)
(1,000)
(800)
(600)
2%
3%
4%
5%
6%
7%
8%
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
-
100
200
300
400
500
0%
2%
4%
6%
8%
10%
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
100
150
200
250
300
350
400
450
500
-3%
1%
5%
9%
13%
17%
21%
25%
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
(100)
100
300
500
700
900
1,100
5%
10%
15%
20%
25%
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
(1,000)
(800)
(600)
(400)
(200)
-
200
400
600
0%
2%
4%
6%
8%
10%
12%
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
(350)
(300)
(250)
(200)
(150)
(100)
(50)
-
50
5%
8%
11%
14%
17%
20%
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
(1,500)
(1,300)
(1,100)
(900)
(700)
(500)
(300)
(100)
100
300
500
Materials
HealthcareFinancialsEnergyConsumer Staples
Industrials Technology UtilitiesTelecoms
Dark blue Line – Weight in the average Domestic institutional portfolio using our sample of 75 companies – LSLight red line – Relative to MSCI Sector weight (above/below benchmark)– RS
5%
10%
15%
20%
25%
30%
35%
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
200
400
600
800
1,000
1,200
1,400
3%
5%
7%
9%
11%
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
(300)
(200)
(100)
-
100
200
300
Domestic Institutional Portfolios: Sector Positions – Absolute and Relative Over Time
Biggest UW
Biggest OW
Source: FactSet, MSCI, Morgan Stanley Research. Calculated as Domestic Institutional sector ownership minus the sector weight in MSCI India Index. Domestic Institutional ownership is calculated as the ratio of the total holding (USD Mn) of the Domestic Institutions in a sector to the total Domestic Institutions holdings of all sectors.
M O R G A N S T A N L E Y R E S E A R C H
August 2010India Strategy Chartbook
73
Consumer Disc.
FII Portfolios: Sector Positions – Absolute and Relative Over Time
0%
2%
4%
6%
8%
10%
12%
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
(400)
(300)
(200)
(100)
-
100
200
8%
10%
12%
14%
16%
18%
20%
22%
24%
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
(900)
(800)
(700)
(600)
(500)
(400)
(300)
(200)(100)
-100
200
-1%
1%
3%
5%
7%
9%
11%
13%
15%
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
100
200
300
400
500
600
700
800
y
0%
1%
2%
3%
4%
5%
6%
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
(300)
(250)
(200)
(150)
(100)
(50)
-
50
100
150
200
4%
6%
8%
10%
12%
14%
16%
18%
20%
22%
24%
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
(200)
(100)
-
100
200
300
400
0%
5%
10%
15%
20%
25%
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
(800)
(600)
(400)
(200)
-
200
400
0%
2%
4%
6%
8%
10%
12%
14%
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
(250)
(200)
(150)
(100)
(50)
-
50
100
150
200
250
10%
15%
20%
25%
30%
35%
40%
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
200
400
600
800
1,000
Materials
HealthcareFinancialsEnergyConsumer Staples
Industrials Technology UtilitiesTelecoms
Dark blue Line - Weight in the average FII portfolio using our sample of 75 companies – LSLight red line – Relative to MSCI Sector weight (above/below benchmark)– RS
-1%
1%
3%
5%
7%
9%
11%
13%
15%
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
(400)
(300)
(200)
(100)
-
100
200
0%
5%
10%
15%
20%
25%
30%
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
(1,200)
(1,000)
(800)
(600)
(400)
(200)
-
Biggest UW Biggest OW
Source: FactSet, MSCI, Morgan Stanley Research. Calculated as FII sector ownership minus the sector weight in MSCI India Index. FII ownership is calculated as the ratio of the total holding (USD Mn) of the FII’s in a sector to the total FII holdings of all sectors.
M O R G A N S T A N L E Y R E S E A R C H
August 2010India Strategy Chartbook
74
Consumer Disc.
Total Institutional Portfolios: Sector Positions – Absolute and Relative Over Time
0%
3%
6%
9%
12%
15%
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
(400)
(300)
(200)
(100)
-
100
200
300
400
5%
8%
11%
14%
17%20
0120
0220
0320
0420
0520
0620
0720
0820
0920
10
(1,400)
(1,200)
(1,000)
(800)
(600)
(400)
(200)
-
2%
3%
4%
5%
6%
7%
8%
9%
10%
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
100
200
300
400
500
600
700
y
2%
3%
4%
5%
6%
7%
8%
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
(150)
(100)
(50)
-
50
100
150
200
250
300
4%
7%
10%
13%
16%
19%
22%
25%
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
(400)
(200)
-
200
400
600
800
0%
5%
10%
15%
20%
25%
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
(700)
(600)
(500)
(400)
(300)
(200)
(100)
-100
200
300
2%
4%
6%
8%
10%
12%
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
(200)
(150)
(100)
(50)
-
50
0%
5%
10%
15%
20%
25%
30%
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
(200)
(100)
-
100
200
300
400
500
600
700
800
Materials
HealthcareFinancialsEnergyConsumer Staples
Industrials Technology UtilitiesTelecoms
Dark blue Line - Weight in the average Institutional portfolio (domestic + foreign) using our sample of 75 companies – LSLight red line – Relative to MSCI Sector weight (above/below benchmark)– RS
3%
6%
9%
12%
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
(350)
(300)
(250)
(200)
(150)
(100)
(50)
-
50
100
150
2%
7%
12%
17%
22%
27%
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
(500)
(400)
(300)
(200)
(100)
-
100
200
300
400
Biggest OW
Biggest UW
Source: FactSet, MSCI, Morgan Stanley Research. Calculated as total institutional sector ownership minus the sector weight in MSCI India Index. Total Institutional ownership is calculated as the ratio of the total holding (USD Mn) of institutions in a sector to the total holdings of institutions across all sectors.
M O R G A N S T A N L E Y R E S E A R C H
August 2010India Strategy Chartbook
75
Consumer Disc.
Sell-Side Consensus Net Buy Ratio
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
2001
2002
2003
2005
2006
2007
2009
2010 -0.4
-0.2
0.0
0.2
0.4
0.6
0.8
1.0
2001
2002
2003
2005
2006
2007
2009
2010
-0.4
-0.2
0.0
0.2
0.4
0.6
0.8
1.0
2001
2002
2003
2005
2006
2007
2009
2010
-0.2
-0.1
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
2001
2002
2003
2005
2006
2007
2009
2010
-0.1
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
2001
2002
2003
2005
2006
2007
2009
2010
-0.1
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
2001
2002
2003
2005
2006
2007
2009
2010
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
2001
2002
2003
2005
2006
2007
2009
2010
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
2001
2002
2003
2005
2006
2007
2009
2010
Materials
HealthcareFinancialsEnergyConsumer Staples
Industrials Technology UtilitiesTelecoms
Dark blue Line – Average Sector Consensus Rating, Light red line – Average of Total MS Coverage Ratings
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
2001
2002
2003
2005
2006
2007
2009
2010
-0.3
-0.2
-0.1
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
2001
2002
2003
2005
2006
2007
2009
2010
Source: FactSet, MSCI, Morgan Stanley ResearchSector consensus rating is calculated as ratio of average net buy ratings of the sector constituents to the average number of ratings of the sector constituents.
M O R G A N S T A N L E Y R E S E A R C H
August 2010India Strategy Chartbook
76
Macro Indicators for Sectors
Source: FactSet, MSCI, RBI, Bloomberg, Morgan Stanley Research
-40%
-20%
0%
20%
40%
60%
80%
100%
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
3
4
5
6
7
8
9
1091-day yield (in percent) - RS
Energy Performance: MSCI India Energy Relative to MSCI India YoY
-85%
-65%
-45%
-25%
-5%
15%
35%
55%
75%
1996
1998
2000
2002
2004
2006
2008
2010
12 month correlation of monthly relative returns of MSCI Tech vs. MSCI India and INR
-60%
-20%
20%
60%
100%
140%
180%
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
-12%
-4%
4%
12%
20%
28%
36%
MSCI Cons Discretionary YoY Returns
Cons Durables Production YoY Change (3MMA) - RS
-4%
1%
6%
11%
16%
21%
26%
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
-110%
-60%
-10%
40%
90%
140%
190%
MSCI India Industrial YoY Returns
3 MMA Nominal IIP growth - LS
0%
5%
10%
15%
20%
25%
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
-50%
-30%
-10%
10%
30%
50%
70%
90%
110%Perf ormance of MSCI India Cons Staples Relativ e to MSCI India - RS
3MMA Nominal IIP growth
3
4
5
6
7
8
9
10
11
1998
2000
2001
2002
2003
2005
2006
2007
2008
2010
-50%
-30%
-10%
10%
30%
50%
70%
90%91 day Yield
Performance of MSCI India Utilities Relative to MSCI India - RS
64%
68%
72%
76%
2006
2007
2008
2009
2010
2011
-40%
-20%
0%
20%
40%
Credit Deposit Ratio pushed forward 7 months (LS)
Performance of MSCI India Financials Relative to MSCI India - RS
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
-50%
-30%
-10%
10%
30%
50%
70%
90%CRB Index YoY Returns
Perf ormance of MSCI India Materials Relativ e to MSCI India - RS
Energy Moves with 91-day Yields Industrials vs. IIP Growth Tech Correlates Negatively with INR Cons. Disc. vs. Non-Durables Growth
Materials vs. CRB Index Utilities vs. 91-day Yields Cons. Staples vs. IIP Growth Financials vs. Credit-Deposit Ratio
M O R G A N S T A N L E Y R E S E A R C H
August 2010India Strategy Chartbook
77
Consumer Disc.
12M Beta Relative to MSCI India
0.4
0.6
0.8
1.0
1.2
1.4
1995
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2010
-
0.2
0.4
0.6
0.8
1.0
1.2
1995
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2010
-
0.4
0.8
1.2
1.6
2.0
2.4
2.819
9519
9719
9819
9920
0020
0120
0220
0320
0420
0520
0620
0720
0820
10
0.5
0.7
0.9
1.1
1.3
1.5
1.7
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2008
2009
2010
0.3
0.6
0.9
1.2
1.5
1.8
2.1
1995
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2010
(0.2)
0.2
0.6
1.0
1.4
1.8
1995
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2010
0.2
0.4
0.6
0.8
1.0
1.2
1995
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2010
0.3
0.5
0.7
0.9
1.1
1.3
1.5
1.7
1.9
1995
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2010
Materials
HealthcareFinancialsEnergyConsumer Staples
Industrials Technology UtilitiesTelecoms
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1995
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2010
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
1.1
1.2
1.3
1.4
1995
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2010
Source: FactSet, MSCI, Morgan Stanley Research
M O R G A N S T A N L E Y R E S E A R C H
August 2010India Strategy Chartbook
78
China
MSCI India Performance Relative to Country Index Since Jan-08
-35%-30%-25%-20%-15%
-10%-5%0%5%
10%
Jan-
08Ap
r-08
Jul-0
8O
ct-0
8Ja
n-09
Apr-
09Ju
l-09
Oct
-09
Jan-
10Ap
r-10
Jul-1
0
-50%
-40%
-30%
-20%
-10%
0%
10%
Jan-
08Ap
r-08
Jul-0
8O
ct-0
8Ja
n-09
Apr-
09Ju
l-09
Oct
-09
Jan-
10Ap
r-10
Jul-1
0
-50%
-40%
-30%
-20%
-10%
0%
10%
Jan-
08Ap
r-08
Jul-0
8O
ct-0
8Ja
n-09
Apr-
09Ju
l-09
Oct
-09
Jan-
10Ap
r-10
Jul-1
0
-35%-30%-25%-20%-15%-10%-5%0%5%
10%Ja
n-08
Apr-
08Ju
l-08
Oct
-08
Jan-
09Ap
r-09
Jul-0
9O
ct-0
9Ja
n-10
Apr-
10Ju
l-10 -45%
-35%
-25%
-15%
-5%
5%
15%
Jan-
08Ap
r-08
Jul-0
8O
ct-0
8Ja
n-09
Apr-
09Ju
l-09
Oct
-09
Jan-
10Ap
r-10
Jul-1
0
x̀
-45%
-35%
-25%
-15%
-5%
5%
15%
Jan-
08Ap
r-08
Jul-0
8O
ct-0
8Ja
n-09
Apr-
09Ju
l-09
Oct
-09
Jan-
10Ap
r-10
Jul-1
0
-40%
-30%
-20%
-10%
0%
10%
20%
30%
Jan-
08Ap
r-08
Jul-0
8O
ct-0
8Ja
n-09
Apr-
09Ju
l-09
Oct
-09
Jan-
10Ap
r-10
Jul-1
0
-60%
-50%
-40%
-30%
-20%
-10%
0%
10%
Jan-
08Ap
r-08
Jul-0
8O
ct-0
8Ja
n-09
Apr-
09Ju
l-09
Oct
-09
Jan-
10Ap
r-10
Jul-1
0
-35%-30%-25%-20%-15%-10%-5%0%5%
10%
Jan-
08Ap
r-08
Jul-0
8O
ct-0
8Ja
n-09
Apr-
09Ju
l-09
Oct
-09
Jan-
10Ap
r-10
Jul-1
0
-40%-35%-30%-25%-20%-15%-10%-5%0%5%
10%
Jan-
08Ap
r-08
Jul-0
8O
ct-0
8Ja
n-09
Apr-
09Ju
l-09
Oct
-09
Jan-
10Ap
r-10
Jul-1
0
Europe
BRICEMJapanBrazil
USA APXJ World IndexACWI
Source: FactSet, MSCI, Morgan Stanley Research
M O R G A N S T A N L E Y R E S E A R C H
August 2010India Strategy Chartbook
79
Reliance Industries
Stock Performance Relative to MSCI India Since Jan-08
-25%-20%-15%-10%-5%0%5%
10%15%20%25%30%
Jan-
08Ap
r-08
Jul-0
8O
ct-0
8Ja
n-09
Apr-
09Ju
l-09
Oct
-09
Jan-
10Ap
r-10
Jul-1
0
-20%
0%
20%
40%
60%
80%
100%
120%
140%
160%
Jan-
08
May
-08
Sep-
08
Jan-
09
May
-09
Sep-
09
Jan-
10
May
-10
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
Jan-
08Ap
r-08
Jul-0
8O
ct-0
8Ja
n-09
Apr-
09Ju
l-09
Oct
-09
Jan-
10Ap
r-10
Jul-1
0
-40%
-20%
0%
20%
40%
60%
80%
Jan-
08Ap
r-08
Jul-0
8O
ct-0
8Ja
n-09
Apr-
09Ju
l-09
Oct
-09
Jan-
10Ap
r-10
Jul-1
0
-80%
-70%
-60%
-50%
-40%
-30%
-20%
-10%
0%
10%
Jan-
08Ap
r-08
Jul-0
8O
ct-0
8Ja
n-09
Apr-
09Ju
l-09
Oct
-09
Jan-
10Ap
r-10
Jul-1
0
-60%
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
Jan-
08
May
-08
Sep-
08
Jan-
09
May
-09
Sep-
09
Jan-
10
May
-10
-20%
0%
20%
40%
60%
80%
100%
120%
Jan-
08
May
-08
Sep-
08
Jan-
09
May
-09
Sep-
09
Jan-
10
May
-10
-20%
0%
20%
40%
60%
80%
100%Ja
n-08
Apr-
08Ju
l-08
Oct
-08
Jan-
09Ap
r-09
Jul-0
9O
ct-0
9Ja
n-10
Apr-
10Ju
l-10
0%
20%40%
60%
80%100%
120%
140%
160%180%
200%
Jan-
08Ap
r-08
Jul-0
8O
ct-0
8Ja
n-09
Apr-
09Ju
l-09
Oct
-09
Jan-
10Ap
r-10
Jul-1
0
-40%
-30%
-20%
-10%
0%
10%
20%
Jan-
08Ap
r-08
Jul-0
8O
ct-0
8Ja
n-09
Apr-
09Ju
l-09
Oct
-09
Jan-
10Ap
r-10
Jul-1
0
Maruti Suzuki Hindustan Unilever
Infosys TechnologiesLarsen &Toubro
State Bank of India Sun Pharmaceutical
Bharti AirtelTata Steel
DLF
Source: FactSet, MSCI, Morgan Stanley Research
M O R G A N S T A N L E Y R E S E A R C H
August 2010India Strategy Chartbook
80
India’s Coming Growth Acceleration: Does it Also Mean High Equity Returns?• Key Debate: Will India’s accelerating growth translate into high equity returns: Chetan Ahya, in his recent report entitled China and India:
New Tigers of Asia, Part III, dated August 13, 2010, argues that India's growth will accelerate to a sustainable 9-10% by 2013-15, after an average of 7.3% over the past decade. The combined effect of demographics, structural reforms, and globalization will help create a virtuous cycle of productive job creation, income growth, savings, investments, and higher GDP growth.
• Starting Point on Price and ROE Matter for Long-term Equity Returns: There are several examples from history when high growth has not translated into robust equity returns. In our view, for high macro economic growth to translate into strong equity returns, there are two necessary conditions: 1) a sensible starting point of valuations (i.e., the growth story should not already be in the price); and 2) the ability of companies of listed stocks to translate macro growth into earnings, which in turn needs discipline on equity capital supply or, put another way, reasonable ROE.
• Valuations Appear Fair: India seems to score well on both counts. On various valuation models we use, the long-term growth that seems priced into Indian equities is tolerable. Our residual income model implies that the equity risk premium is around 6% (implying a long-term rupee return from equities of around 14% using the 10-year bond yield at 8%). The regression of historical P/E and P/B multiple to long-term equity returns suggests similar outcomes, and so does a regression analysis on the value assigned to future growth. In summary, valuations are offering equity investors an acceptable level of equity risk premium.
• The ROE Debate: The cyclical pressure on ROE is quite evident. The MSCI Index ROE has dropped to its decade low driven down by a fall in net margins as well as asset turnover. No doubt, India’s nominal ROE will fall over the long run as long-term interest rates decline (with the progress of time, the potential growth rate falls, and with enhanced productivity, inflation expectations should also drop). However, the excess ROE over interest rates will likely remain intact for some time to come. Our arguments are: 1) GDP growth, industrial growth and earnings growth correlate well in India – a higher growth should translate into earnings growth; 2) balance sheets are under-levered lending upside surprise to ROE – Indian corporations have historically exhibited good discipline on raising equity though easier access to global capital flows is the downside risk; and c) India’s growth dynamic – including its balanced economic model – is lending itself to lower cyclicality in earnings as we have seen over the past 10 years. All in all, Indian companies may experience a decline in nominal ROE, but the spread of ROE over long-term interest rates appears to have a good case.
• Structural Liquidity Helps: An additional factor that helps is the structural liquidity story: The side effect of the demographic dividend is the structural liquidity story. As domestic savings rise, a younger population will likely take more risk with its savings, causing higher flows into riskier asset classes like equity shares. The flow of savings into equities is supported by a strong capital market infrastructure. The starting point on capital markets is a good relative to the physical economy, i.e., the financial economy seems more well developed than the physical economy.
• Conclusion: For now, we do not believe that long-term returns from Indian equities are likely to move significantly from recent trends (the trailing 10-year CAGR in returns is 14% in rupee terms). The valuation and ROE levels should be watched closely.
M O R G A N S T A N L E Y R E S E A R C H
August 2010India Strategy Chartbook
81
Sources: FactSet, MSCI, BSE, Morgan Stanley Research
P/E vs. Long Term Returns: 11% CAGR in Returns
Value Assigned to Future Growth: 13% CAGR in Returns P/B vs. Long Term Returns: 12% CAGR in Returns
R2 = 0 .5 3 3 0
0 %
5 %
1 0 %
1 5 %
2 0 %
2 5 %
3 0 % 4 0 % 5 0 % 6 0 % 7 0 % 8 0 % 9 0 %
V a lu e A s s ig n e d to Fu tu re G r o w th
A n n u a l 1 0 - y e a r f w dMS CI In d ia r e tu r n s
Cu r r e n t V A FG o f 6 1 % imp lie s a1 0 - y e a r a n n u a l r e tu r n o f 1 3 %
Valuations Point to 11% to 14% Annual Index Returns Over 10-years in Base Case
R2 = 0.5472
0%
5%
10%
15%
20%
25%
10 15 20 25 30 35 40
MSCI India Trailing P/E
Annual 10-year fwdMSCI India returns Current P/E of 21 implies a
10-year annual return of 11%
R2 = 0.6625
0%
5%
10%
15%
20%
25%
1 2 3 4 5 6
MSCI India Trailing P/B
Annual 10-year fwdMSCI India returns
Current P/B of 3.2 implies a10-year annual return of 12%
4 .0
4 .5
5 .0
5 .5
6 .0
6 .5
7 .0
7 .5
8 .0
Nov
-06
Feb-
07
Apr-
07
Jul-0
7
Sep-
07
Dec
-07
Feb-
08
May
-08
Jul-0
8
Oct
-08
Jan-
09
Mar
-09
Jun-
09
Aug-
09
Nov
-09
Jan-
10
Apr-
10
Jun-
10
Eq u it y r is k p r e m iu m im p lie d b y o u r R e s id u a l in c o m e m o d e l
C u r r e n t ER P o f 6 .0 % im p lie s a 1 0 - y e a r a n n u a l r e tu r n o f 1 3 .5 %
Implied Equity Risk Premium Suggests Fair Returns
M O R G A N S T A N L E Y R E S E A R C H
August 2010India Strategy Chartbook
82
ROE Takes a Cyclical Knock India’s ROE Drivers: Margin Drop Leads Fall
Excess ROE Over Long Bond Yield: 8-year Low
Sources: Worldscope, Factset, MSCI, Company Data, Morgan Stanley Research
ROE Under Cyclical Pressure
6 0 %
7 0 %
8 0 %
9 0 %
1 0 0 %
1 1 0 %
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
7 %
9 %
1 1 %
1 3 %
1 5 %
1 7 %
1 9 %
2 1 %
2 3 %
2 5 %M S C I In d ia 's RO E d r iv e r sRO E T r e n d
A s s e t tu r n Tr e n d
Ne t M a r g in T r e n d
2 %
4 %
6 %
8 %
1 0 %
1 2 %
1 4 %
1 6 %
1 8 %
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
M S C I In d ia RO E m in u s 1 0 -y e a r G o v t . Bo n d Y ie ld
5 - y e a r mo v in g a v e r a g e
1 4 %
1 5 %
1 6 %
1 7 %
1 8 %
1 9 %
2 0 %
2 1 %
2 2 %
2 3 %
2 4 %
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
M S C I In d ia RO E
5 - y e a r mo v in g a v e r a g e
0%
5%
10%
15%
20%
25%
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
ROE Trend
India
EM
World
Asia Pac ex-Japan
BRIC
India’s ROE Superiority vs. Globe
M O R G A N S T A N L E Y R E S E A R C H
August 2010India Strategy Chartbook
83
Profits Share in GDP Approaching New Peak
0 %
1 %
2 %
3 %
4 %
5 %
6 %
7 %
8 %
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
e20
11e
2012
eNe t P r o f it f o r t h e In d ia n c o r p o r a t e sS h a r e i n G D P
GDP Growth vs. Earnings Growth: High Correlation
Source: Worldscope, Factset, MSCI, RBI, Capitaline, Morgan Stanley Estimates, Morgan Stanley Research
Structural Case for ROE Is Intact
R 2 = 0 .4 2 7 8
3 %
4 %
5 %
6 %
7 %
8 %
9 %
1 0 %
- 1 5 % - 5 % 5 % 1 5 % 2 5 % 3 5 % 4 5 %
Ea r n in g s G r o w th f o r M S CI In d ia
In d ia Re a l G DP
G r o w th
-50%-40%-30%-20%-10%
0%10%20%30%40%50%60%70%
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
A s iaPac ex Japan
In d ia
A C W or ld
M SC I
EM
India’s Earnings: Lower Cyclicality
Earnings: Strong Correlation with Nominal IIPR 2 = 0 .6 9 3 8
7 %
8 %
9 %
1 0 %
1 1 %
1 2 %
1 3 %
1 4 %
1 5 %
1 6 %
1 7 %
- 1 5 % - 5 % 5 % 1 5 % 2 5 % 3 5 % 4 5 %
Ea r n in g s G r o w th f o r M S CI In d ia
In d ia A n n u a lNo m in a l
IIP G r o w th
M O R G A N S T A N L E Y R E S E A R C H
August 2010India Strategy Chartbook
84
Equity Issues Correlate with Equity Valuations
Source: RBI, CMIE, Company Data, Morgan Stanley Estimates, Morgan Stanley Research
Corporate India Is Mostly Disciplined About Capital Structure
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
F199
2F1
993
F199
4F1
995
F199
6F1
997
F199
6F1
999
F200
0F2
001
F200
2F2
003
F200
4F2
005
F200
6F2
007
F200
8F2
009
F201
0EF2
011E
F201
2E
0%
5%
10%
15%
20%
25%
Cash to total capital employed (RS)
De bt to Equity (LS)
For M S Cove rage (e x-Financials )
Balance Sheets Under Levered
Preference for Debt Over Equity Through Cycles
Easier Access to Foreign Capital is a Key Risk
0
5
1 0
1 5
2 0
2 53 0
3 5
4 0
4 5
5 0
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Eq u ity Is s u a n c e s
D e b t Is s u a n c e s
1 2 M ro l l in g is s u a n c e s (U S $ b n )
C o rp o ra te In d ia P re fe rs D e b t O ve r E q u i ty E xc e p t D u r in g P e r io d s o f E xc e s s ive E q u i ty Va lu a tio n s
0 %
3 %
6 %
9 %
1 2 %
1 5 %
1 8 %
2 1 %
F199
4
F199
5
F199
6
F199
7
F199
8
F199
9
F200
0
F200
1
F200
2
F200
3
F200
4
F200
5
F200
6
F200
7
F200
8
F200
9E
F201
0E
F201
1E
T o ta l D o m e s tic Is s u a n c e In c r e m e n ta l C r e d it In te r n a l a c c r u a l F o r e ig n Eq u ity is s u a n c e sEC B s F D I
A s % o f G D P2 1 .2 % o f G D P( U S $ 2 4 9 b n )
1 2 .2 % o f G D P( U S $ 3 9 b n )
10
15
20
25
30
35
40
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
5.0%12M Rolling Equity Issua nce s/GDP (RS )
M S CI India P E (LS )
M O R G A N S T A N L E Y R E S E A R C H
August 2010India Strategy Chartbook
85
Equity Savings Likely > US$300bn in the Next Decade
GDP (Rs b)Financial
Savings (Rs b)
Financial Savings to
GDPEquity
Savings
Equities to Financial Savings
F2007 41,292 6,439 15.6% 586 9.1%F2008 47,234 7,066 15.0% 891 12.6%F2009E 53,218 7,334 13.8% 193 2.6%F2010E 58,354 8,188 14.0% 246 3.0%F2011E 65,828 9,401 14.3% 376 4.0%F2012E 74,154 10,776 14.5% 647 6.0%F2013E 82,682 12,222 14.8% 794 6.5%F2014E 92,190 13,858 15.0% 970 7.0%F2015E 102,792 15,708 15.3% 1,178 7.5%F2016E 114,613 17,801 15.5% 1,424 8.0%F2017E 127,794 20,168 15.8% 1,714 8.5%F2018E 142,490 22,843 16.0% 2,056 9.0%F2019E 158,876 25,867 16.3% 2,457 9.5%F2020E 177,147 29,285 16.5% 2,929 10.0%
Sources: RBI, Capitaline, Morgan Stanley Estimates, Morgan Stanley Research
India’s Structural Liquidity Story Should Help
0 %
2 %
4 %
6 %
8 %
1 0 %
1 2 %
F197
1
F197
3
F197
5
F197
7
F197
9
F198
1
F198
3
F198
5
F198
7
F198
9
F199
1
F199
3
F199
5
F199
7
F199
9
F200
1
F200
3
F200
5
F200
7
F200
9
S h a r e o f e q u i t y in v e s t m e n t s in t o t a l a s s e t s ( a t c o s t )
Households Grossly Underexposed to Equities Equity Savings Track Trailing Returns
-40%
-20%
0%
20%
40%
60%
80%
100%
F198
3
F198
5
F198
7
F198
9
F199
1
F199
3
F199
5
F199
7
F199
9
F200
1
F200
3
F200
5
F200
7
F200
9
0 .0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
Equity savings to GDP (RS)3-year trailing CAGR - BSE Sens ex (LS)
Household Equities’ Ownership Has Declined Sharply
2 0 %
2 5 %
3 0 %
3 5 %
4 0 %
4 5 %
Mar
-01
Sep-
01
Mar
-02
Sep-
02
Mar
-03
Sep-
03
Mar
-04
Sep-
04
Mar
-05
Sep-
05
Mar
-06
Sep-
06
Mar
-07
Sep-
07
Mar
-08
Sep-
08
Mar
-09
Sep-
09
Mar
-10
Br o a d M a r k e t O w n e r s h ip o f P u b lic , Do m e s t ic M u tu a l Fu n d a n d Fin a n c ia l
M O R G A N S T A N L E Y R E S E A R C H
August 2010India Strategy Chartbook
86
At a Glance: Indian Equity Market(Calendar year) 2007 2008 2009 2010 YTD
India GDP* (US $ billion) 947 1,229 1,212 1,314
Market Cap (US $ billion) 1,815 637 1,301 1,420
Listed Companies (BSE) 4,887 4,921 4,955 4,990
FII ow nership (1250 NSE listed stocks) 20% 19% 16% 17%
Flows (US $ million)
FII (cash) 17,790 -12,745 17,650 12,710
FII (Futures) -13,110 5,731 -4,049 -1,993
Domestic f ixed income fund 26,759 -7,197 29,505 -3,312
Domestic equity mutual fund 7,044 8,032 145 -705
Domestic mutual fund activity 1,719 3,517 -1,175 -3,347
Domestic Insurance activity 4,252 13,647 7,003 3,884
Total AUM 139,436 84,981 142,643 142,753
Equity AUM 56,075 23,916 44,323 45,452
Trading (US$ million)
Total trading volumes 4,031,800 3,673,445 4,288,391 3,651,427
Cash trading volumes 1,104,939 1,058,155 1,055,523 659,434
Derivatives trading volumes 2,926,861 2,615,290 3,232,867 2,991,993
FII cash trading volumes 381,890 354,045 242,921 179,640
FII derivatives trading volumes 512,095 530,946 611,775 646,325
Domestic MF trading volumes 88,976 82,623 76,896 48,616
Equity issuances (domestic + Euro) 32,947 19,217 17,000 15,454
FCCBs 8,727 532 2,549 1,118
Debt Issuances 8,776 22,888 31,090 29,513
Sources: SEBI, AMFI, BSE, NSE, Prime database, CMIE, Morgan Stanley Research, E = Morgan Stanley estimates
M O R G A N S T A N L E Y R E S E A R C H
August 2010India Strategy Chartbook
87
At a Glance: Morgan Stanley Stock Coverage
•Assuming no change in payout, ** Consensus earnings growth based on IBES estimates. Forward valuation ratios based on Morgan Stanley Research estimates. NA = Not Applicable, NR = Not Rated. . ++ Rating/estimates for this company have been removed from consideration in this report because, under applicable law and/or Morgan Stanley policy, Morgan Stanley may be precluded from issuing such information with respect to this company at this time, Past performance is no guarantee of future results. Results shown do not include transaction costs. Source: IBES, Morgan Stanley Research
Price MKt Cap 6M Price Trail 3 Year Implied LT Fwd Fwd Fwd Trailing Fwd Trailing8/26/2010 (US$m) Rating Perf EPS CAGR EPS grth Div grth* ROE PE P/B P/Sales Div Yield FCF Yield F2011 F2012
BSE Sensex 18,226 593,759 10.9% 7.6% 12.5% 17.6% 14.7 2.6 1.7 1.7% 3.1% 23.2% 18.8%Aban Offshore Ltd 789 733 Overw eight -33.1% NM 5.1% 39.5% 16.4% 4.6 0.8 1.1 0.5% -65.4% 51.0% 8.1%ACC Ltd. 868 3,483 Overw eight -6.0% 15.3% 5.1% 5.3% 19.3% 11.3 2.2 2.0 3.3% 4.9% -0.5% 4.4%Adani Enterprises Ltd 629 1,624 Overw eight 29.5% NM 28.5% 58.9% 10.6% 15.2 1.6 2.7 0.2% -10.7% NM 73.2%Adani Pow er 137 6,382 Overw eight 29.0% NM 39.8% NM 25% 14.3 3.6 68.8 0.0% -28.8% 416.1% 219.8%Aditya Birla Nuvo 810 1,962 Overw eight -3.7% -57.1% 49.7% 56.5% 8% 15.5 1.2 0.5 1.8% 5.8% NM 69.9%Ambuja Cements Ltd. 121 3,932 Overw eight 13.1% -10.5% 9.4% 8.4% 18% 12.4 2.3 2.6 2.3% 1.5% 10.0% 3.9%Ashok Leyland Ltd. 71 2,018 Overw eight 42.8% -1.4% 13.7% 7.8% 18% 13.0 2.3 1.3 3.9% 4.2% 56.5% 26.6%AXIS Bank 1,364 11,796 Equal-Weight 21.3% 45.3% 13.6% 17.6% 18% 15.7 2.8 - 1.5% 0.0% 27.5% 26.2%Bajaj Auto Ltd. 2,778 8,580 Equal-Weight 52.9% NM 15.1% 13.7% 47% 18.4 8.6 3.4 1.9% 5.0% 41.3% 13.1%Balrampur Chini Mills 87 479 Underw eight -17.1% -15.4% 16.6% 24.8% 8% 23.9 1.9 1.5 1.8% -1.5% 8.8% NMBank of Baroda 829 6,464 Overw eight 41.9% 43.9% 4.9% 9.5% 17% 8.8 1.5 - 2.4% 0.0% 21.1% 27.1%Bank of India 463 5,199 Overw eight 38.8% 15.7% 8.6% 11.5% 17% 7.9 1.4 - 2.2% 0.0% 33.7% NMBharat Forge 354 1,684 Underw eight 44.3% NM NM 33.9% 10% 55.0 5.7 2.4 0.6% 7.6% 178.2% 55.7%Bharat Petroleum Corp. 763 5,885 Overw eight 35.6% 1.8% 8.9% 7.7% 15% 11.2 1.6 0.3 3.2% 29.3% 12.0% 14.6%Bharti Airtel Limited 321 26,004 Overw eight 14.9% 28.8% 8.1% 16.4% 17% 15.2 2.5 3.1 1.0% -1.8% -14.7% 14.2%BHEL 2,479 25,897 Equal-Weight 5.4% 21.4% 16.3% 18.2% 27% 20.4 5.6 3.6 1.3% 7.8% 28.4% 21.5%Biocon Ltd 336 1,435 Underw eight 27.9% 13.5% 14.1% 17.5% 17% 18.9 3.2 2.8 1.1% 2.9% 14.6% 16.4%Canara Bank 511 5,202 Equal-Weight 30.4% 22.3% 2.7% 10.2% 15% 7.8 1.2 - 2.5% 0.0% 5.1% 21.1%Cipla Ltd. 307 5,096 Equal-Weight -2.6% 16.4% 13.9% 17.1% 20% 18.3 3.7 4.1 1.1% 6.6% 7.3% 16.0%Colgate-Palmolive India 826 2,397 Underw eight 19.5% 30.5% 16.1% 6.3% 98% 24.1 23.6 5.7 3.2% 3.1% 11.0% 16.1%Corporation Bank 596 1,824 Overw eight 34.9% 29.7% 1.7% 4.9% 18% 6.1 1.1 - 3.9% 0.0% 22.5% 21.1%Nagarjuna Construction Company 153 837 Overw eight -0.6% 9.1% 12.6% 19.0% 12% 13.2 1.5 0.8 1.3% -9.8% 37.5% 10.0%Dabur India 209 3,878 Equal-Weight 23.9% 20.8% 19.4% 16.6% 43% 29.9 13.0 5.4 1.5% 3.4% 20.8% 19.4%Dish TV India Ltd 50 1,139 Overw eight 35.1% -27.5% NM NM NM NM NM 4.9 0.0% 0.0% -33.8% -82.6%DLF Limited 318 11,523 Overw eight 7.1% -2.3% 17.2% 29.3% 10% 18.9 1.9 6.7 0.8% -22.1% 19.1% 38.3%Dr. Reddy's Lab 1,340 4,818 Equal-Weight 17.3% -51.5% 42.4% 23.4% 23% 16.9 3.9 3.2 0.7% 3.7% 21.4% 20.2%Educomp Solutions Ltd. 567 1,180 Equal-Weight -15.4% 101.7% 12.7% 38.5% 18% 18.1 3.2 5.3 0.3% -5.9% 24.8% 44.2%EIH Limited 134 1,128 Underw eight 10.9% -23.5% 28.8% 28.2% 10% 33.7 3.3 5.4 0.7% 1.3% 106.6% 39.1%Essar Oil 127 3,249 Underw eight -3.6% NM 56.0% 0.0% 13% 29.4 3.9 0.4 0.0% -18.3% 72.1% 52.1%GAIL (India) 448 12,141 Overw eight 12.3% -2.7% 12.5% 12.5% 19% 14.8 2.9 2.7 2.2% -0.7% 21.1% 19.7%GlaxoSmithKline Pharma 1,872 3,384 Equal-Weight 9.1% 12.9% 17.3% 12.8% 28% 24.5 6.8 8.3 2.0% 2.5% 1.6% 15.0%GMR Infrastructure Ltd. 60 4,656 Underw eight 9.3% 59.4% 17.5% NM 7% 41.0 2.8 4.3 0.0% -12.9% 2.8% 112.5%Godrej Consumer Products Limited 387 2,689 Equal-Weight 57.0% 20.6% 19.7% NM 24% 28.9 6.8 6.2 1.5% 2.1% 39.8% 24.4%Grasim Industries 2,045 4,015 Overw eight -24.2% 16.3% -0.1% 11.9% 15% 8.5 1.2 0.9 1.8% 16.4% -23.3% 1.1%Great Eastern Shipping 301 977 Overw eight 14.3% -22.4% 5.7% 8.4% 11% 6.3 0.7 1.5 2.7% 5.3% 40.5% 36.0%Hathw ay Cable and Datacom Ltd. 202 616 Overw eight 0.5% NM NM NM 4% 73.4 3.0 3.9 0.0% 1.0% NM 72.7%HCL Technologies 412 5,977 Overw eight 12.1% 4.1% 13.8% 18.4% 22% 15.2 3.3 2.3 1.9% 4.4% 35.1% 21.0%
Consensus Earnings growth**
M O R G A N S T A N L E Y R E S E A R C H
August 2010India Strategy Chartbook
88
At a Glance: Morgan Stanley Stock Coverage
* Assuming no change in payout, ** Consensus earnings growth based on IBES estimates. Forward valuation ratios based on Morgan Stanley Research estimates. NA = Not Applicable, NR = Not Rated. . ++ Rating/estimates for this company have been removed from consideration in this report because, under applicable law and/or Morgan Stanley policy, Morgan Stanley may be precluded from issuing such information with respect to this company at this time, Past performance is no guarantee of future results. Results shown do not include transaction costs. Source: IBES, Morgan Stanley Research
Price MKt Cap 6M Price Trail 3 Year Implied LT Fwd Fwd Fwd Trailing Fwd Trailing8/26/2010 (US$m) Rating Perf EPS CAGR EPS grth Div grth* ROE PE P/B P/Sales Div Yield FCF Yield F2011 F2012
HDFC 628 19,229 Overw eight 25.5% 21.2% 17.9% 14.7% 20% 25.0 5.0 - 1.6% 0.0% 23.2% 20.6%HDFC Bank 2,177 21,268 Overw eight 27.7% 26.0% 18.6% 23.3% 17% 21.8 3.8 - 1.0% 0.0% 30.9% 26.1%Hero Honda Motor Ltd 1,844 7,858 Underw eight 4.0% 37.5% 10.4% -2.9% 47% 15.7 7.3 2.3 3.3% 11.8% 11.3% 12.0%Hexaw are Technologies Limited 71 222 Overw eight 9.9% 2.0% 2.3% 7.1% 13% 7.5 1.0 1.0 2.7% 9.2% -30.9% 66.5%Hindalco Industries 164 6,694 Equal-Weight 1.6% -0.2% 2.5% 20.1% 11% 10.4 1.2 0.5 0.9% 22.0% 47.9% 18.8%Hindustan Petroleum 526 3,804 Overw eight 51.7% -14.8% 14.0% 13.0% 13% 11.0 1.4 0.1 3.2% 87.5% 25.4% 15.2%Hindustan Unilever 265 12,359 Underw eight 12.6% 11.6% 15.9% 6.2% 70% 26.6 18.6 3.3 3.2% 5.5% 2.1% 14.4%Hotel Leelaventure Limited 51 411 Equal-Weight 11.5% -37.9% 32.2% 27.5% 3% 29.9 1.0 4.4 0.8% -23.7% -57.3% NMICICI Bank 986 23,466 Equal-Weight 13.1% 8.9% 16.1% 14.3% 10% 19.4 1.9 - 2.0% 0.0% 23.5% 23.8%IDBI 125 2,622 Underw eight 5.3% 6.5% 6.8% 9.9% 10% 9.9 1.0 - 2.8% 0.0% 31.8% 26.0%Idea Cellular Ltd. 69 4,891 Overw eight 14.1% 0.0% 14.7% 0.0% 6% 23.5 1.5 1.8 0.4% 4.1% -17.1% 19.0%IDFC 184 5,718 Equal-Weight 15.1% 22.1% 15.5% 19.9% 13% 18.4 2.3 - 1.4% 0.0% 22.6% 23.5%Indian Hotels Company Ltd 104 1,608 Equal-Weight 16.4% NM NM 18.4% 4% 78.5 3.1 3.0 1.0% -4.9% 119.7% 110.8%Indian Oil Corp 403 20,534 Overw eight 26.9% -9.8% 9.9% 9.0% 14% 12.0 1.7 0.2 2.9% 16.3% 22.5% 11.3%IndusInd Bank 226 2,284 Equal-Weight 51.6% 51.5% 17.4% 22.4% 13% 19.6 2.6 - 1.1% 0.0% 203.9% 49.5%Info Edge (India) Ltd. 1,032 602 Overw eight 24.3% 27.3% 23.4% 53.1% 17% 33.9 5.8 11.9 0.2% 1.2% 24.9% 29.6%Infosys Technologies 2,764 33,850 Equal-Weight 6.2% 17.1% 15.3% 17.4% 24% 20.9 5.0 7.0 1.4% 1.7% 12.2% 19.2%ITC Ltd. 163 26,593 Overw eight 40.6% 14.1% 17.4% 3.8% 30% 24.4 7.4 6.9 2.4% 5.1% 16.6% 15.8%IVRCL Infrastructures & Projects LTD 161 919 Overw eight 0.2% 17.3% 11.8% 25.2% 14% 12.8 1.8 0.8 0.8% -8.5% 18.1% 28.0%Jain Irrigation Systems 1,262 2,049 Equal-Weight 52.9% 46.9% 19.4% 30.2% 24% 24.3 5.8 2.7 0.7% 1.4% 30.4% 34.4%Jaiprakash Associates Limited 115 5,146 Overw eight -13.3% 29.3% 13.8% 20.9% 15% 15.2 2.3 2.9 1.0% -0.1% -1.2% 20.7%Jaypee Infra 80 2,367 Equal-Weight NM NM 14.0% NM 19% 11.5 2.2 17.3 0.0% -22.7% NM 20.8%Jindal Steel & Pow er 321 5,691 Equal-Weight 11.5% 72.4% 10.9% 41.4% 29% 13.0 3.7 6.1 0.2% 1.3% 26.7% 15.6%JSW Steel Ltd. 1,127 4,501 Overw eight 5.3% 6.7% 8.0% 17.9% 23% 6.9 1.6 1.1 0.7% 2.0% 34.2% 57.4%Kotak Mahindra Bank 838 6,224 Underw eight 12.9% 34.0% 13.7% 48.2% 15% 20.0 3.0 - 0.4% 0.0% 28.0% 18.5%LANCO Infratech Ltd 71 3,659 Overw eight 55.1% 46.4% 15.1% NM 25% 14.1 3.5 1.8 0.0% -30.8% 88.0% 18.4%Larsen & Toubro 1,862 23,750 Overw eight 18.8% NM 16.9% 21.8% 20% 22.5 4.5 3.0 0.8% 0.2% 21.6% 26.2%Lupin Ltd. 1,868 3,351 Overw eight 24.7% 28.3% 14.9% 25.6% 26% 17.5 4.6 3.3 0.5% -0.1% 31.4% 20.0%Mahanagar Telephone Nigam 63 846 Underw eight -12.5% -51.5% 28.5% 10.9% 2% 19.6 0.3 1.0 1.9% -25.2% 21.6% 40.1%Mahindra & Mahindra 619 7,588 Overw eight 23.0% -10.2% 9.4% 17.4% 25% 12.0 2.9 1.9 1.1% 5.7% 12.2% 17.6%Marico Limited 126 1,632 Underw eight 21.7% 31.7% 15.7% 23.8% 31% 25.2 7.9 2.9 1.0% 5.0% 22.0% 22.1%Maruti Suzuki India Limited 1,227 7,568 Equal-Weight -16.2% 16.9% 8.7% 24.7% 17% 13.9 2.3 1.2 0.7% 6.3% -4.2% 12.0%Mindtree Ltd. 517 445 Equal-Weight -2.9% 30.6% 4.6% 22.9% 19% 12.4 2.4 1.6 1.0% 15.2% -31.1% 47.1%MphasiS Limited 623 2,786 Underw eight -6.1% 71.3% 8.8% 24.9% 29% 12.0 3.5 3.1 0.7% 6.7% 4.7% 10.1%National Aluminium 411 5,651 Underw eight 6.7% -29.3% 17.7% 9.8% 12% 21.5 2.5 5.2 2.4% -2.7% 61.2% 23.1%Nestle India 3,076 6,329 Equal-Weight 17.3% 28.7% 21.3% 10.9% 124% 30.6 38.0 5.8 2.9% 2.3% -3.2% 23.3%NTPC 198 34,830 Equal-Weight -2.5% 12.2% 11.1% 9.9% 16% 14.3 2.3 3.2 2.6% 1.7% 7.4% 11.5%
Consensus Earnings growth**
M O R G A N S T A N L E Y R E S E A R C H
August 2010India Strategy Chartbook
89
At a Glance: Morgan Stanley Stock Coverage
* Assuming no change in payout, ** Consensus earnings growth based on IBES estimates. Forward valuation ratios based on Morgan Stanley Research estimates. NA = Not Applicable, NR = Not Rated. . ++ Rating/estimates for this company have been removed from consideration in this report because, under applicable law and/or Morgan Stanley policy, Morgan Stanley may be precluded from issuing such information with respect to this company at this time, Past performance is no guarantee of future results. Results shown do not include transaction costs. Source: IBES, Morgan Stanley Research
Price MKt Cap 6M Price Trail 3 Year Implied LT ROE Fwd Fwd Trailing Fwd Trailing8/26/2010 (US$m) Rating Perf EPS CAGR EPS grth Div grth* F2009 PE P/B P/Sales Div Yield FCF Yield F2011 F2012
NMDC Ltd 251 21,233 Equal-Weight -41.9% -23.3% 17.8% 23.5% 34% 12.9 4.4 17.1 1.6% 3.1% 71.5% 19.0%Oil & Natural Gas Corp. 1,281 58,480 Overw eight 14.7% 3.1% 8.5% 5.5% 20% 11.0 2.2 2.7 3.9% 7.6% 19.3% 10.6%Oriental Bank of Commerce 440 2,692 Equal-Weight 60.7% 6.3% 6.1% 11.2% 13% 8.6 1.1 - 2.7% 0.0% 34.3% 23.4%Pantaloon Retail 463 2,088 Overw eight 19.4% 47.8% 21.0% 32.0% 11% 25.1 2.9 1.2 0.5% -8.6% 33.6% 29.8%IBREL 174 1,493 Overw eight 8.8% NM NM NM 2% 36.0 0.7 54.1 0.2% -77.4% NM 120.5%Patni Computer Systems 547 1,502 Underw eight 15.4% 20.1% 7.2% 23.8% 13% 13.0 1.7 2.2 0.8% 5.6% 2.9% 0.9%Punjab National Bank 1,215 8,175 Overw eight 34.7% 36.4% 4.8% 9.4% 19% 9.1 1.7 - 2.4% 0.0% 17.0% 23.7%Ranbaxy Laboratories 481 4,315 Overw eight 3.0% -23.1% 28.8% 8.5% 23% 17.3 3.9 2.9 2.6% 5.0% -7.3% 66.2%Reliance Capital 765 4,018 Equal-Weight -2.8% -14.8% 21.6% 18.0% 7% 30.5 2.3 - 1.1% 0.0% -15.7% 25.2%Reliance Communications Ltd. 160 7,045 Underw eight 1.6% 13.6% 1.3% 6.2% 6% 11.9 0.7 1.5 2.3% 58.8% -45.5% 15.6%Reliance Industries 957 66,783 Equal-Weight -2.2% 6.7% 12.1% 18.8% 14% 13.6 1.9 1.6 1.3% 4.4% 28.1% 19.4%Reliance Infrastructure Limited 1,004 4,843 Overw eight 0.0% 10.4% 16.8% 19.5% 8% 19.5 1.5 2.3 1.0% -2.5% 9.8% 18.0%Shipping Corporation of India 161 1,452 Equal-Weight 12.9% -29.4% 13.9% 11.1% 5% 20.4 1.0 1.9 1.6% -34.1% NM NMShree Renuka Sugars Limited 67 850 Underw eight -19.4% NM 18.8% 42.6% 22% 8.6 1.9 1.9 1.2% -12.7% -26.0% NMSobha Developers Ltd. 353 738 Overw eight 38.8% -14.9% 15.4% 20.2% 10% 18.8 1.8 3.1 1.2% 1.0% 78.4% 24.5%State Bank of India 2,865 43,995 Overw eight 45.0% 17.4% 11.1% 15.4% 15% 11.6 1.7 - 1.8% 0.0% 12.4% 30.0%Steel Authority Of India 185 16,336 Overw eight -15.2% 5.1% 6.3% 11.3% 19% 8.9 1.7 1.9 0.5% -3.8% 13.9% 17.2%Sterlite Industries (India) Limited 152 10,829 Overw eight -22.1% -29.2% 8.2% 21.5% 15% 7.2 1.1 2.1 0.5% -4.7% 34.9% 42.5%Sun Pharmaceutical Industries 1,776 7,853 Equal-Weight 15.3% 19.9% 16.0% 18.9% 17% 21.9 3.7 9.2 1.1% 2.9% 19.8% 13.1%Tata Communications Ltd 334 2,031 Underw eight 18.1% NM NM 12.7% -20% NM 2.8 0.9 1.3% -32.4% 113.2% -25.5%Tata Consultancy Services 874 36,517 Equal-Weight 14.9% 18.5% 15.0% 8.6% 28% 20.5 5.8 5.7 1.2% 2.1% 18.2% 13.0%Tata Motors 998 12,249 Overw eight 40.3% -16.3% 17.7% 11.7% 58% 7.4 4.3 0.6 1.9% 8.5% 416.4% 30.1%Tata Pow er Co 1,269 6,427 Equal-Weight 4.6% 11.0% NM 13.0% 14% NM 2.8 1.0 2.5% -10.6% 16.1% 19.2%Tata Steel 502 9,506 Overw eight -12.5% NM NM 12.6% 26% 5.2 1.4 0.4 2.5% 25.4% NM 21.3%Tata Tea 118 1,555 Equal-Weight 25.4% 2.9% 12.5% 10.1% 9% 19.3 1.8 1.3 2.0% 26.5% 14.1% 17.4%Tech Mahindra Limited 673 1,980 Underw eight -24.7% -1.2% 7.8% 25.8% 25% 7.9 2.0 2.0 1.1% 7.2% 5.0% 7.2%Titan Industries Ltd 2,982 2,825 Overw eight 70.5% 30.8% 23.3% 24.4% 38% 32.5 12.2 2.8 1.1% 2.5% 47.2% 27.5%TVS Motors 141 716 Equal-Weight 100.8% 28.1% 14.6% 24.6% 17% 18.9 3.2 0.8 1.9% 5.6% NM 55.9%Ultratech Cement Ltd 931 2,465 Overw eight -10.3% 11.7% 5.5% 21.3% 17% 11.4 1.9 1.6 0.8% 10.9% -20.7% 10.2%Union Bank of India 349 4,327 Overw eight 36.3% 28.8% 4.7% 12.5% 17% 7.7 1.3 - 2.1% 0.0% 19.5% 24.4%United Phosphorus Limited 187 1,753 Overw eight 23.4% 23.4% 9.7% 15.3% 21% 9.6 2.0 1.5 2.6% 15.2% 30.6% 19.5%UTV Softw are Communications Ltd 506 369 Overw eight 9.3% 8.0% 13.3% NM 11% 9.7 1.0 2.3 0.0% -12.5% NM 49.5%United Spirits Ltd 1,390 3,476 Overw eight 2.1% NM 20.8% 38.7% 11% 31.0 3.4 2.5 0.3% 3.9% 32.9% 34.5%Wipro Ltd. 400 20,889 Equal-Weight -1.5% 15.8% 13.2% 17.6% 22% 17.6 3.9 3.6 1.5% 1.9% 16.8% 12.1%Yes bank 326 2,365 Overw eight 37.9% 64.0% 14.2% 25.7% 18% 15.7 2.9 - 1.1% 0.0% 38.8% 30.6%Zee Entertainment Enterprise Limited 297 3,098 Overw eight 19.8% 18.4% 18.2% 0.0% 17% 18.8 3.1 6.8 0.8% 3.8% 33.1% 19.0%
Consensus Earnings growth**
M O R G A N S T A N L E Y R E S E A R C H
August 2010India Strategy Chartbook
90
Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10Trade Balance (US$billion) -6.6 -9.6 -9.7 -10.1 -10.4 -9.0 -7.8 -10.4 -11.3 -10.6 -12.9 NAExports (US$billion) 13.9 14.2 13.2 14.6 14.3 16.1 19.9 16.9 16.1 17.7 16.2 NAExports (YoY) -12% 0% 18% 9% 11% 35% 54% 36% 35% 30% 13% NAImports (US$billion) 20.5 23.8 22.9 24.8 24.7 25.1 27.7 27.3 27.4 28.3 29.2 NAImports (YoY) -34% -8% -3% 27% 36% 66% 67% 43% 39% 23% 34% NAForeign Direct Investment (US$million) 1512 2332.0 1735.0 1542.0 2042.0 1717.0 1208.0 2214.0 2213.0 NA NA NAForeign Exchange Reserves (US$billion) 278.5 282.8 285.3 282.1 279.5 277.0 275.7 278.3 270.7 275.7 282.8 280.9Net FII Flows (US$million) 4,141 1,791 1,177 2,227 -236 464 4,135 2,220 -1,989 2,100 3,553 2,264Rs/US$1 (period average) 48.4 46.7 46.6 46.6 45.9 46.3 45.5 44.5 45.9 46.6 46.8 46.5M3 (YoY) 19.0% 18.3% 17.8% 17.2% 17.0% 16.4% 16.4% 17.4% 14.5% 14.5% 14.7% NABank Loans (Non-food credit, YoY) 13.0% 10.1% 10.5% 12.7% 15.2% 16.1% 16.9% 18.0% 18.7% 20.3% 19.9% NADeposit Growth Rate (YoY) 20.5% 19.8% 18.9% 18.4% 17.1% 16.8% 17.0% 15.4% 14.2% 13.9% 14.0% NAPrime Lending Rate 11.5% 11.5% 11.5% 11.5% 11.5% 11.5% 11.5% 11.5% 11.5% 11.5% 11.5% NAOne Year Deposit Rate 6.3% 6.3% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0% NA364 day T-Bill Yield 4.6% 4.5% 4.5% 4.5% 4.4% 5.2% 5.3% 5.2% 5.1% 5.2% 5.8% 6.3%91 day T-Bill Yield 4.1% 3.9% 4.3% 4.3% 4.3% 4.0% 4.3% 4.2% 4.1% 5.1% 5.4% 6.0%10 yr Government Bond Yield 7.3% 7.3% 7.3% 7.6% 7.6% 7.8% 7.9% 8.0% 7.6% 7.6% 7.6% 7.9%Industrial Production 9.3% 10.2% 12.0% 17.7% 16.3% 14.7% 14.5% 16.5% 11.3% 7.1% NA NAManufacturing( in %) 9.7% 10.9% 13.1% 19.4% 17.4% 15.7% 15.3% 17.9% 12.0% 7.3% NA NAConsumer Goods 9.7% 12.1% 12.2% 13.1% 3.0% 8.4% 11.0% 11.9% 7.4% 8.3% NA NABasic Goods 5.3% 4.0% 6.0% 8.4% 11.5% 8.5% 10.8% 9.1% 8.2% 3.4% NA NACapital Goods 13.5% 10.2% 11.1% 38.7% 53.7% 44.0% 30.8% 69.9% 34.2% 9.7% NA NAIntermediate Goods 11.0% 15.5% 19.6% 22.8% 21.9% 14.8% 13.4% 10.6% 10.1% 8.7% NA NAConsumer Price Index (YoY) 11.6% 11.5% 13.5% 15.0% 16.2% 14.9% 14.9% 13.3% 13.9% 13.7% NA NAWholesale Price Index (YoY) - All Commodities 0.5% 1.2% 5.6% 8.1% 9.4% 10.1% 11.0% 11.2% 11.1% 10.6% 10.0% NA
Source: RBI, CSO, CMIE, Morgan Stanley Research
At a Glance: Latest Macro Indicators
M O R G A N S T A N L E Y R E S E A R C H
August 2010India Strategy Chartbook
91
Years Ending March 31 F2002 F2003 F2004 F2005 F2006 F2007 F2008 F2009 F2010E F2011E F2012ENational Income GDP (US$ bn) 478 507 600 720 837 947 1,229 1,212 1,314 1,557 1,833Gross domestic product 5.8% 3.8% 8.5% 7.5% 9.5% 9.7% 9.2% 6.7% 7.4% 8.5% 8.4%Agriculture and Allied activities (incl. mining) 5.9% -5.9% 9.3% 0.8% 4.7% 4.3% 4.6% 1.6% 1.6% 5.2% 3.3%Manufacturing, Constn, Electricity 2.8% 6.9% 7.8% 10.5% 10.2% 13.2% 10.1% 4.1% 9.2% 8.6% 8.7%Services 7.2% 7.5% 8.5% 9.1% 11.1% 10.2% 10.5% 9.8% 8.5% 9.5% 9.8%Money and BankingMoney Supply (M3) grow th (avg) 16.2% 16.3% 13.1% 14.2% 16.1% 19.6% 21.8% 20.5% 18.7% 20.0% 20.0%Bank non-food credit (avg y-y increase) 11.9% 25.0% 17.2% 27.5% 33.7% 31.3% 24.3% 24.1% 14.5% 23.0% 25.0%Interest rates91-Day T-Bill Yield (year-end) 6.2% 5.8% 4.3% 5.2% 6.5% 7.4% 7.3% 4.7% 4.3% 6.5% 7.3%Repo Rate (year-end) 8.0% 7.0% 6.0% 6.0% 6.5% 7.5% 7.8% 5.0% 5.0% 6.8% 7.5%PricesWholesale price index (avg y-y increase) 3.7% 3.4% 5.5% 6.5% 4.4% 5.4% 4.7% 8.5% 3.9% 8.4% 5.5%External sectorExports (US$ bn) 44.7 53.8 66.3 85.2 105.2 128.9 166.2 189.0 182.2 222.7 262.6Imports (US$ bn) 56.3 64.5 80.0 118.9 157.1 190.7 257.6 307.7 299.5 366.8 433.1Exports as % of Imports 79% 83% 83% 72% 67% 68% 64% 61% 61% 61% 61%Invisibles, net (US$ bn) 15.0 17.0 27.8 31.2 42.0 52.2 75.7 89.9 78.9 99.0 125.9Current account balance (US$ bn) 3.4 6.3 14.1 (2.5) (9.9) (9.6) (15.7) (28.7) (38.4) (45.1) (44.6)Debt creating capital inf low s (US$ bn) 2.3 (1.8) (2.1) 6.2 7.0 22.2 24.9 14.9 7.5 9.5 12.0Total capital -net (US$ bn) 8.6 10.8 16.7 28.0 25.5 45.2 106.6 7.2 53.6 58.0 67.3Foreign currency reserves (US$ bn)* 54.1 76.1 113.0 141.5 151.6 199.2 309.7 252.0 279.1 284.5 307.7Average exchange rate (USD/INR) 47.7 48.4 45.9 45.0 44.3 45.2 40.3 46.0 47.4 46.0 44.5Year end exchange rate (USD/INR) 48.7 47.6 45.0 43.7 44.5 44.0 40.4 51.3 45.5 45.5 44.0
External debt (US$ bn) 98.8 105.0 111.7 123.2 138.1 172.4 224.4 224.5 261.5 274.0 291.0External debt as a percentage of GDP 20.7% 20.7% 18.6% 17.1% 16.5% 18.2% 18.3% 18.5% 19.9% 17.6% 15.9%Fiscal deficit (As % of GDP)-----Central government 6.2% 5.9% 4.5% 3.9% 4.0% 3.3% 2.6% 6.0% 6.7% 5.0% 4.8%-----State government 4.1% 4.1% 4.4% 3.3% 2.4% 1.8% 1.5% 2.6% 3.2% 2.6% 2.5%-----Consolidated Deficit * 9.9% 9.6% 8.5% 7.2% 6.5% 5.4% 4.0% 8.6% 9.8% 7.6% 7.3%
At a Glance: Macroeconomic Forecasts
Source: RBI, CSO, Budget documents, Morgan Stanley Research
* Total of Central & State Govt deficit does not tally due to inter-governmental transactions. E = Morgan Stanley Research estimates;
M O R G A N S T A N L E Y R E S E A R C H
August 2010India Strategy Chartbook
92
At a Glance: News flow and Market Performance
1 2 ,0 0 0
1 3 ,0 0 0
1 4 ,0 0 0
1 5 ,0 0 0
1 6 ,0 0 0
1 7 ,0 0 0
1 8 ,0 0 0
1 9 ,0 0 0
01-S
ep-0
9
08-S
ep-0
915
-Sep
-09
22-S
ep-0
929
-Sep
-09
06-O
ct-0
913
-Oct
-09
20-O
ct-0
9
27-O
ct-0
903
-Nov
-09
10-N
ov-0
917
-Nov
-09
24-N
ov-0
901
-Dec
-09
08-D
ec-0
915
-Dec
-09
22-D
ec-0
9
29-D
ec-0
905
-Jan
-10
12-J
an-1
019
-Jan
-10
26-J
an-1
002
-Feb
-10
09-F
eb-1
0
16-F
eb-1
023
-Feb
-10
02-M
ar-1
009
-Mar
-10
16-M
ar-1
023
-Mar
-10
30-M
ar-1
006
-Apr
-10
13-A
pr-1
0
20-A
pr-1
027
-Apr
-10
04-M
ay-1
011
-May
-10
18-M
ay-1
025
-May
-10
01-J
un-1
0
08-J
un-1
015
-Jun
-10
22-J
un-1
029
-Jun
-10
06-J
ul-1
013
-Jul
-10
20-J
ul-1
027
-Jul
-10
03-A
ug-1
0
10-A
ug-1
017
-Aug
-10
24-A
ug-1
0
L y o n d e ll r e je c t s R IL 's t a k e o v er b id
RBI h ik e s r e p o & r e v e r s e r e p o b y 2 5 b p s
S EBI b a n s 1 4 in s u r e r s f r o m is s u in g UL IP S
3 Ga u c t io n b r in g s $ 2 3 b n f o r G o v t
I IP G r o w t h 1 6 .8 % Y o Y in De c 0 9
G o ld h it s a ll t im e h ig h
IIP g r o w t h a c c e le r a t es t o 7 .8 %in J u n
In f la t io n ( W P I) t u r n s p o s it iv e
C o n g r e s s w in s a s s e m b lye le c t io n s in 3 s t a t e s
C r e d it P o lic y - RBI r a is e s S L R r a t e t o 2 5 % f r o m 2 4 %
C r e d it g r o w t h a t 1 2 -y e a r lo w
RIL b id t o a c q u ir e L y o n d e ll Ba s s e ll
Du b a i w o r ld s e e k s d e b t r e s t r u c t u r in g
Q 2 G DP g r o w t h a t 7 .9 %
Fo o d in f la t io n a t a m u lt i- y e a rh ig h
1 0 - y e a r b o n d y ie ld a t 1 4 m h ig h
BS E & NS E e x t e n d t r a d in g h o u r s Ex p o r t
g r o w t h a c c e le r a t e s f ir s t t im e s in c e S e p - 0 8
RBI h ik e s C RR b y 7 5 b p s in it s c r e d it p o lic y
O b a m a A n n o u n c e s Ne w Ba n k Re g u la t io n
S ig n s o f t r o u b le in Eu r o m a r k e t s a n d
C h in a h ik e s b a n k RRR f u r t h e r b y 5 0 b p s
Fe d r a is e s d is c o u n t r a t e b y 2 5 b p s
Un io n Bu d g e t F2 0 1 1
C h in a h ik e s b a n k RRR b y 5 0 b p s
W P I a t 1 3 - m t h h ig h
S & P u p g r a d e s In d ia o u t lo o k t o s t a b le f r o m - v e
RBI h ik e s r e p o , r e v e r s e r e p o & C RR b y 2 5 b p s
S & P c u t s G r e e c e r a t in g t o J u n k
EU & IM F u n v e il a t r n $ p a c k a g e f o r d e b t r id d e n e u r o c o u n t r ie s
No n c o m p e t e p a c t b e t w e e n A m b a n i b r o se n d s
G o v t d e r e g u la t es g a s p r ic e s
Eu r o z o n e a g r e e s o n G r e e k b a ilo u t
G r e e c e , s e c u r e s $ 3 3 Bn a id
Eu r o z o n e a p p r o v e s $ 4 0 .5 Bn a id f o r G r e e c e
G o v t . d e r u g u la t e s P e t r o l
G o v t . m a k e s 2 5 % p u b lic f lo a t m a n d a t o r y f o r lis t e d c o s
C h in a e n d d o lla r y u a n p e g
RBI h ik e s r e p o & r e v e r s e r e p o b y 2 5 b p s
M o n s o o n O v e r s e n t ir e c o u n t r y 1 0 d a y s a h e a d : IM D
7 ( o u t o f 9 1 ) EU b a n k s f a ile d S t r e s s T e s t
INR r a t in g u p g r a d e d t o Ba 1 b y M o d d y
RBI h ik e s r e p o & r e v e r s e r e p o b y 2 5 b p s
J u n IP g r o w t h a t 7 .1 % ( Y o Y ) v s 1 1 .5 % in M a y
L o k S a b h a p a s s e s C iv il Nu c le a r L ia b ilit y B ill
D ir e c t T a x C o d e g e t s c a b in e t 's n o d
Source: Economic Times, Business Standard, Morgan Stanley Research
M O R G A N S T A N L E Y R E S E A R C H
August 2010India Strategy Chartbook
93
The information and opinions in Morgan Stanley Research were prepared or are disseminated by Morgan Stanley Asia Limited (which accepts the responsibility for its contents) and/or Morgan Stanley Asia (Singapore) Pte. (Registration number 199206298Z, regulated by the Monetary Authority of Singapore, which accepts the responsibility for its contents), and/or Morgan Stanley Asia (Singapore) Securities Pte Ltd (Registration number 200008434H, regulated by the Monetary Authority of Singapore, which accepts the responsibility for its contents), and/or Morgan Stanley Taiwan Limited and/or Morgan Stanley & Co International plc, Seoul Branch, and/or Morgan Stanley Australia Limited (A.B.N. 67 003 734 576, holder of Australian financial services license No. 233742, which accepts responsibility for its contents), and/or Morgan Stanley Smith Barney Australia Pty Ltd (A.B.N. 19 009 145 555, holder of Australian financial services license No. 240813, which accepts responsibility for its contents), and/or Morgan Stanley India Company Private Limited and their affiliates (collectively, "Morgan Stanley").For important disclosures, stock price charts and equity rating histories regarding companies that are the subject of this report, please see the Morgan Stanley Research Disclosure Website at www.morganstanley.com/researchdisclosures, or contact your investment representative or Morgan Stanley Research at 1585 Broadway, (Attention: Research Management), New York, NY, 10036 USA.Analyst CertificationThe following analysts hereby certify that their views about the companies and their securities discussed in this report are accurately expressed and that they have not received and will not receive direct or indirect compensation in exchange for expressing specific recommendations or views in this report: Ridham Desai.Unless otherwise stated, the individuals listed on the cover page of this report are research analysts.
Global Research Conflict Management PolicyMorgan Stanley Research has been published in accordance with our conflict management policy, which is available at www.morganstanley.com/institutional/research/conflictpolicies.
Important US Regulatory Disclosures on Subject CompaniesThe following analyst or strategist (or a household member) owns securities (or related derivatives) in a company that he or she covers or recommends in Morgan Stanley Research: Ridham Desai - Hindustan Unilever (common or preferred stock), Infosys Technologies (common or preferred stock), ITC Ltd. (common or preferred stock), Zee Entertainment Enterprise Limited (common or preferred stock); Utkarsh Khandelwal - Reliance Infrastructure Limited (common or preferred stock); Amruta Pabalkar - Reliance Industries (common or preferred stock), State Bank of India (common or preferred stock), Tata Consultancy Services (common or preferred stock), Tata Steel (common or preferred stock), Union Bank of India (common or preferred stock). Morgan Stanley policy prohibits research analysts, strategists and research associates from investing in securities in their sub industry as defined by the Global Industry Classification Standard ("GICS," which was developed by and is the exclusive property of MSCI and S&P). Analysts may nevertheless own such securities to the extent acquired under a prior policy or in a merger, fund distribution or other involuntary acquisition.As of July 30, 2010, Morgan Stanley beneficially owned 1% or more of a class of common equity securities of the following companies covered in Morgan Stanley Research: Aban Offshore Ltd, Dr. Reddy's Lab, Grasim Industries, HDFC Bank, Hindalco Industries, IDFC, IndusInd Bank, Marico Limited, Ranbaxy Laboratories, Reliance Infrastructure Limited, Sobha Developers Ltd.Within the last 12 months, Morgan Stanley managed or co-managed a public offering (or 144A offering) of securities of IDFC, Sesa Goa.Within the last 12 months, Morgan Stanley has received compensation for investment banking services from Adani Power, DLF Limited, IDFC, IndusInd Bank, Sesa Goa, Sobha Developers Ltd.
Disclosures Section
Morgan Stanley ModelWare is a proprietary analytic framework that helps clients uncover value, adjusting for distortions and ambiguities created by local accounting regulations. For example, ModelWare EPS adjusts for one-time events, capitalizes operating leases (where their use is significant), and converts inventory from LIFO costing to a FIFO basis. ModelWare also emphasizes the separation of operating performance of a company from its financing for a more complete view of how a company generates earnings.
M O R G A N S T A N L E Y R E S E A R C H
August 2010India Strategy Chartbook
94
Disclosures (cont.)In the next 3 months, Morgan Stanley expects to receive or intends to seek compensation for investment banking services from AAC Acoustic, AXIS Bank, Cairn India Ltd., Cipla Ltd., DLF Limited, Dr. Reddy's Lab, Essar Oil, Grasim Industries, HDFC Bank, Hindalco Industries, Idea Cellular Ltd., IDFC, Indian Hotels Company Ltd, IndusInd Bank, Infosys Technologies, Jain Irrigation Systems, Jaiprakash Associates Limited, Larsen & Toubro, Oil & Natural Gas Corp., Ranbaxy Laboratories, Reliance Industries, Reliance Infrastructure Limited, State Bank of India, Sun Pharmaceutical Industries, Tata Consultancy Services, Tata Steel, Zee Entertainment Enterprise Limited.Within the last 12 months, Morgan Stanley has received compensation for products and services other than investment banking services from AXIS Bank, Bharat Petroleum Corp., Essar Oil, Hindalco Industries, Reliance Industries, State Bank of India.Within the last 12 months, Morgan Stanley has provided or is providing investment banking services to, or has an investment banking client relationship with, the following company: AAC Acoustic, Adani Power, AXIS Bank, Cairn India Ltd., Cipla Ltd., DLF Limited, Dr. Reddy's Lab, Essar Oil, Grasim Industries, HDFC Bank, Hindalco Industries, Idea Cellular Ltd., IDFC, Indian Hotels Company Ltd, IndusInd Bank, Infosys Technologies, Jain Irrigation Systems, Jaiprakash Associates Limited, Larsen & Toubro, Oil & Natural Gas Corp., Ranbaxy Laboratories, Reliance Industries, Reliance Infrastructure Limited, Sesa Goa, Sobha Developers Ltd., State Bank of India, Sun Pharmaceutical Industries, Tata Consultancy Services, Tata Steel, Zee Entertainment Enterprise Limited.Within the last 12 months, Morgan Stanley has either provided or is providing non-investment banking, securities-related services to and/or in the past has entered into an agreement to provide services or has a client relationship with the following company: AAC Acoustic, AXIS Bank, Bharat Petroleum Corp., Essar Oil, HDFC Bank, Hindalco Industries, IDFC, Reliance Industries, State Bank of India, Ultratech Cement Ltd, Union Bank of India.Within the last 12 months, an affiliate of Morgan Stanley & Co. Incorporated has received compensation for products and services other than investment banking services from AAC Acoustic.The equity research analysts or strategists principally responsible for the preparation of Morgan Stanley Research have received compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors, firm revenues and overall investment banking revenues.Morgan Stanley and its affiliates do business that relates to companies/instruments covered in Morgan Stanley Research, including market making, providing liquidity and specialized trading, risk arbitrage and other proprietary trading, fund management, commercial banking, extension of credit, investment services and investment banking. Morgan Stanley sells to and buys from customers the securities/instruments of companies covered in Morgan Stanley Research on a principal basis. Morgan Stanley may have a position in the debt of the Company or instruments discussed in this report.Certain disclosures listed above are also for compliance with applicable regulations in non-US jurisdictions.
M O R G A N S T A N L E Y R E S E A R C H
August 2010India Strategy Chartbook
95
STOCK RATINGSMorgan Stanley uses a relative rating system using terms such as Overweight, Equal-weight, Not-Rated or Underweight (see definitions below). Morgan Stanley does not assign ratings of Buy, Hold or Sell to the stocks we cover. Overweight, Equal-weight, Not-Rated and Underweight are not the equivalent of buy, hold and sell. Investors should carefully read the definitions of all ratings used in Morgan Stanley Research. In addition, since Morgan Stanley Research contains more complete information concerning the analyst's views, investors should carefully read Morgan Stanley Research, in its entirety, and not infer the contents from the rating alone. In any case, ratings (or research) should not be used or relied upon as investment advice. An investor's decision to buy or sell a stock should depend on individual circumstances (such as the investor's existing holdings) and other considerations.Global Stock Ratings Distribution(as of July 31, 2010)For disclosure purposes only (in accordance with NASD and NYSE requirements), we include the category headings of Buy, Hold, and Sell alongside our ratings of Overweight, Equal- weight, Not-Rated and Underweight. Morgan Stanley does not assign ratings of Buy, Hold or Sell to the stocks we cover. Overweight, Equal-weight, Not-Rated and Underweight are not the equivalent of buy, hold, and sell but represent recommended relative weightings (see definitions below). To satisfy regulatory requirements, we correspond Overweight, our most positive stock rating, with a buy recommendation; we correspond Equal-weight and Not-Rated to hold and Underweight to sell recommendations, respectively.
Disclosures (cont.)
Data include common stock and ADRs currently assigned ratings. An investor's decision to buy or sell a stock should depend on individual circumstances (such as the investor's existing holdings) and other considerations. Investment Banking Clients are companies from whom Morgan Stanley received investment banking compensation in the last 12 months..
Analyst Stock RatingsOverweight (O or Over) - The stock's total return is expected to exceed the total return of the relevant country MSCI Index, on a risk-adjusted basis over the next 12-18 months.Equal-weight (E or Equal) - The stock's total return is expected to be in line with the total return of the relevant country MSCI Index, on a risk-adjusted basis over the next 12-18 months.Not-Rated (NR) - Currently the analyst does not have adequate conviction about the stock's total return relative to the relevant country MSCI Index on a risk-adjusted basis, over the next 12-18 months.Underweight (U or Under) - The stock's total return is expected to be below the total return of the relevant country MSCI Index, on a risk-adjusted basis, over the next 12-18 months.Unless otherwise specified, the time frame for price targets included in Morgan Stanley Research is 12 to 18 months.Analyst Industry ViewsAttractive (A): The analyst expects the performance of his or her industry coverage universe over the next 12-18 months to be attractive vs. the relevant broad market benchmark, as indicated below.In-Line (I): The analyst expects the performance of his or her industry coverage universe over the next 12-18 months to be in line with the relevant broad market benchmark, as indicated below.Cautious (C): The analyst views the performance of his or her industry coverage universe over the next 12-18 months with caution vs. the relevant broad market benchmark, as indicated below.Benchmarks for each region are as follows: North America - S&P 500; Latin America - relevant MSCI country index or MSCI Latin America Index; Europe - MSCI Europe; Japan - TOPIX; Asia - relevant MSCI country index.
Coverage Universe Investment Banking Clients (IBC)
Stock Rating Category Count % of Total
Count % of Total IBC
% of Rating Category
Overweight/Buy 1095 42% 380 44% 35%Equal-weight/Hold 1123 43% 388 45% 35%Not-Rated/Hold 14 1% 4 0% 29%Underweight/Sell 362 14% 93 11% 26%Total 2,594 865
M O R G A N S T A N L E Y R E S E A R C H
August 2010India Strategy Chartbook
96
Disclosures (cont.)Important Disclosures for Morgan Stanley Smith Barney LLC CustomersCiti Investment Research & Analysis (CIRA) research reports may be available about the companies or topics that are the subject of Morgan Stanley Research. Ask your Financial Advisor or use Research Center to view any available CIRA research reports in addition to Morgan Stanley research reports.Important disclosures regarding the relationship between the companies that are the subject of Morgan Stanley Research and Morgan Stanley Smith Barney LLC, Morgan Stanley and Citigroup Global Markets Inc. or any of their affiliates, are available on the Morgan Stanley Smith Barney disclosure website at www.morganstanleysmithbarney.com/researchdisclosures.For Morgan Stanley and Citigroup Global Markets, Inc. specific disclosures, you may refer to www.morganstanley.com/researchdisclosures and https://www.citigroupgeo.com/geopublic/Disclosures/index_a.html.Each Morgan Stanley Equity Research report is reviewed and approved on behalf of Morgan Stanley Smith Barney LLC. This review and approval is conducted by the same person who reviews the Equity Research report on behalf of Morgan Stanley. This could create a conflict of interest.
Other Important DisclosuresMorgan Stanley & Co. International PLC and its affiliates have a significant financial interest in the debt securities of AXIS Bank, Jaiprakash Associates Limited, Larsen & Toubro, Ranbaxy Laboratories, Reliance Industries, Reliance Infrastructure Limited, Sesa Goa, State Bank of India, Tata Steel.Morgan Stanley produces an equity research product called a "Tactical Idea." Views contained in a "Tactical Idea" on a particular stock may be contrary to the recommendations or views expressed in research on the same stock. This may be the result of differing time horizons, methodologies, market events, or other factors. For all research available on a particular stock, please contact your sales representative or go to Client Link at www.morganstanley.com.Morgan Stanley Research does not provide individually tailored investment advice. Morgan Stanley Research has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. Morgan Stanley recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a financial adviser. The appropriateness of a particular investment or strategy will depend on an investor's individual circumstances and objectives. The securities, instruments, or strategies discussed in Morgan Stanley Research may not be suitable for all investors, and certain investors may not be eligible to purchase or participate in some or all of them.The fixed income research analysts or strategists principally responsible for the preparation of Morgan Stanley Research have received compensation based upon various factors, including quality, accuracy and value of research, firm profitability or revenues (which include fixed income trading and capital markets profitability or revenues), client feedback and competitive factors. Fixed Income Research analysts' or strategists' compensation is not linked to investment banking or capital markets transactions performed by Morgan Stanley or the profitability or revenues of particular trading desks.Morgan Stanley Research is not an offer to buy or sell or the solicitation of an offer to buy or sell any security/instrument or to participate in any particular trading strategy. The "Important US Regulatory Disclosures on Subject Companies" section in Morgan Stanley Research lists all companies mentioned where Morgan Stanley owns 1% or more of a class of common equity securities of the companies. For all other companies mentioned in Morgan Stanley Research, Morgan Stanley may have an investment of less than 1% in securities/instruments or derivatives of securities/instruments of companies and may trade them in ways different from those discussed in Morgan Stanley Research. Employees of Morgan Stanley not involved in the preparation of Morgan Stanley Research may have investments in securities/instruments or derivatives of securities/instruments of companies mentioned and may trade them in ways different from those discussed in Morgan Stanley Research. Derivatives may be issued by Morgan Stanley or associated persons.With the exception of information regarding Morgan Stanley, Morgan Stanley Research is based on public information. Morgan Stanley makes every effort to use reliable, comprehensive information, but we make no representation that it is accurate or complete. We have no obligation to tell you when opinions or information in Morgan Stanley Research change apart from when we intend to discontinue equity research coverage of a subject company. Facts and views presented in Morgan Stanley Research have not been reviewed by, and may not reflect information known to, professionals in other Morgan Stanley business areas, including investment banking personnel.Morgan Stanley Research personnel may participate in company events such as site visits and are generally prohibited from accepting payment by the company of associated expenses unless pre-approved by authorized members of Research management.The value of and income from your investments may vary because of changes in interest rates, foreign exchange rates, default rates, prepayment rates, securities/instruments prices, market indexes, operational or financial conditions of companies or other factors. There may be time limitations on the exercise of options or other rights in securities/instruments transactions. Past performance is not necessarily a guide to future performance. Estimates of future performance are based on assumptions that may not be realized. If provided, and unless otherwise stated, the closing price on the cover page is that of the primary exchange for the subject company's securities/instruments.Morgan Stanley may make investment decisions or take proprietary positions that are inconsistent with the recommendations or views in this report.To our readers in Taiwan: Information on securities/instruments that trade in Taiwan is distributed by Morgan Stanley Taiwan Limited ("MSTL"). Such information is for your reference only. Information on any securities/instruments issued by a company owned by the government of or incorporated in the PRC and listed in on the Stock Exchange of Hong Kong ("SEHK"), namely the H-shares, including the component company stocks of the Stock Exchange of Hong Kong ("SEHK")'s Hang Seng China Enterprise Index; or any securities/instruments issued by a company that is 30% or more directly- or indirectly-owned by the government of or a company incorporated in the PRC and traded on an exchange in Hong Kong or Macau, namely SEHK's Red Chip shares, including the component company of the SEHK's China-affiliated Corp Index is distributed only to Taiwan Securities Investment Trust Enterprises ("SITE"). The reader should independently evaluate the investment risks and is solely responsible for their investment decisions. Morgan Stanley Research may not be distributed to the public media or quoted or used by the public media without the express written consent of Morgan Stanley. Information on securities/instruments that do not trade in Taiwan is for informational purposes only and is not to be construed as a recommendation or a solicitation to trade in such securities/instruments. MSTL may not execute transactions for clients in these securities/instruments.
M O R G A N S T A N L E Y R E S E A R C H
August 2010India Strategy Chartbook
97
Disclosures (cont.)To our readers in Hong Kong: Information is distributed in Hong Kong by and on behalf of, and is attributable to, Morgan Stanley Asia Limited as part of its regulated activities in Hong Kong. If you have any queries concerning Morgan Stanley Research, please contact our Hong Kong sales representatives.Certain information in Morgan Stanley Research was sourced by employees of the Shanghai Representative Office of Morgan Stanley Asia Limited for the use of Morgan Stanley Asia Limited.Morgan Stanley Research is disseminated in Japan by Morgan Stanley MUFG Securities Co., Ltd.; in Hong Kong by Morgan Stanley Asia Limited (which accepts responsibility for its contents); in Singapore by Morgan Stanley Asia (Singapore) Pte. (Registration number 199206298Z) and/or Morgan Stanley Asia (Singapore) Securities Pte Ltd (Registration number 200008434H), regulated by the Monetary Authority of Singapore, which accepts responsibility for its contents; in Australia to "wholesale clients" within the meaning of the Australian Corporations Act by Morgan Stanley Australia Limited A.B.N. 67 003 734 576, holder of Australian financial services license No. 233742, which accepts responsibility for its contents; in Australia to "wholesale clients" and "retail clients" within the meaning of the Australian Corporations Act by Morgan Stanley Smith Barney Australia Pty Ltd (A.B.N. 19 009 145 555, holder of Australian financial services license No. 240813, which accepts responsibility for its contents; in Korea by Morgan Stanley & Co International plc, Seoul Branch; in India by Morgan Stanley India Company Private Limited; in Canada by Morgan Stanley Canada Limited, which has approved of, and has agreed to take responsibility for, the contents of Morgan Stanley Research in Canada; in Germany by Morgan Stanley Bank AG, Frankfurt am Main and Morgan Stanley Private Wealth Management Limited, Niederlassung Deutschland, regulated by Bundesanstalt fuer Finanzdienstleistungsaufsicht (BaFin); in Spain by Morgan Stanley, S.V., S.A., a Morgan Stanley group company, which is supervised by the Spanish Securities Markets Commission (CNMV) and states that Morgan Stanley Research has been written and distributed in accordance with the rules of conduct applicable to financial research as established under Spanish regulations; in the United States by Morgan Stanley & Co. Incorporated, which accepts responsibility for its contents. Morgan Stanley & Co. International plc, authorized and regulated by the Financial Services Authority, disseminates in the UK research that it has prepared, and approves solely for the purposes of section 21 of the Financial Services and Markets Act 2000, research which has been prepared by any of its affiliates. Morgan Stanley Private Wealth Management Limited, authorized and regulated by the Financial Services Authority, also disseminates Morgan Stanley Research in the UK. Private U.K. investors should obtain the advice of their Morgan Stanley & Co. International plc or Morgan Stanley Private Wealth Management representative about the investments concerned. RMB Morgan Stanley (Proprietary) Limited is a member of the JSE Limited and regulated by the Financial Services Board in South Africa. RMB Morgan Stanley (Proprietary) Limited is a joint venture owned equally by Morgan Stanley International Holdings Inc. and RMB Investment Advisory (Proprietary) Limited, which is wholly owned by FirstRand Limited.The information in Morgan Stanley Research is being communicated by Morgan Stanley & Co. International plc (DIFC Branch), regulated by the Dubai Financial Services Authority (the DFSA), and is directed at Professional Clients only, as defined by the DFSA. The financial products or financial services to which this research relates will only be made available to a customer who we are satisfied meets the regulatory criteria to be a Professional Client.The information in Morgan Stanley Research is being communicated by Morgan Stanley & Co. International plc (QFC Branch), regulated by the Qatar Financial Centre Regulatory Authority (the QFCRA), and is directed at business customers and market counterparties only and is not intended for Retail Customers as defined by the QFCRA.As required by the Capital Markets Board of Turkey, investment information, comments and recommendations stated here, are not within the scope of investment advisory activity. Investment advisory service is provided in accordance with a contract of engagement on investment advisory concluded between brokerage houses, portfolio management companies, non-deposit banks and clients. Comments and recommendations stated here rely on the individual opinions of the ones providing these comments and recommendations. These opinions may not fit to your financial status, risk and return preferences. For this reason, to make an investment decision by relying solely to this information stated here may not bring about outcomes that fit your expectations.The trademarks and service marks contained in Morgan Stanley Research are the property of their respective owners. Third-party data providers make no warranties or representations of any kind relating to the accuracy, completeness, or timeliness of the data they provide and shall not have liability for any damages of any kind relating to such data. The Global Industry Classification Standard ("GICS") was developed by and is the exclusive property of MSCI and S&P.Morgan Stanley has based its projections, opinions, forecasts and trading strategies regarding the MSCI Country Index Series solely on publicly available information. MSCI has not reviewed, approved or endorsed the projections, opinions, forecasts and trading strategies contained herein. Morgan Stanley has no influence on or control over MSCI's index compilation decisions.Morgan Stanley Research, or any portion thereof may not be reprinted, sold or redistributed without the written consent of Morgan Stanley.Morgan Stanley Research is disseminated and available primarily electronically, and, in some cases, in printed form.Additional information on recommended securities/instruments is available on request.
M O R G A N S T A N L E Y R E S E A R C H
August 2010India Strategy Chartbook
98© 2010 Morgan Stanley
The Americas1585 BroadwayNew York, NY 10036-8293United StatesTel: +1 (1)212 761 4000
Europe20 Bank Street, Canary WharfLondon E14 4ADUnited KingdomTel: +44 (0)20 7425 8000
Japan4-20-3 Ebisu, Shibuya-kuTokyo 150-6008JapanTel: +81 (0)3 5424 5000
Asia/Pacific1 Austin Road WestKowloonHong KongTel: +852 2848 5200